Cut corporate taxes, NRI exemptions: CAG

The Comptroller and Auditor General of India (CAG), the government's apex auditor, has called for lower corporate taxes to stop non-resident firms from misusing the double taxation avoidance agreements (DTAAs).

Many companies are doing this on account of higher levies in India, he said.

In its latest review report on direct taxes submitted to Parliament last week, CAG observed that in several countries with which India has a DTAA, tax rates range between 20 and 30 per cent of net business income of companies, while in India, the tax deduction at source ranges between 10 and 20 per cent on gross receipts, which works out to be much higher.

"We feel that a lower flat rate of tax applicable across streams of incomes irrespective of destinations would be a workable alternative," the report said.

The report also said the Income Tax Act and DTAA together provide for a multitude of exemptions to incomes accruing to non-resident Indians. These have so far not been quantified in terms of revenue foregone, it said while suggesting the need to phase out these exemptions.

The CAG study pointed out that lowering levies would facilitate greater taxpayer compliance, reduce cost of doing business in India and also cut down on disputes.

"This lower rate, if incorporated in the direct tax code (DTC), would thus override all other rates provided in the DTAA and would not require re-negotiations with other countries," it said, urging the government to introduce and implement it along with the direct tax reforms from April 2012.

"We are of the opinion that a flat and lower tax rate applied to all payments regardless of their purpose or destination will be a more viable alternative," it added.