Case for disallowing interest deductibility and reducing corporate tax rate

Abstract

Tax deductibility of interest cost seems to be the major reason for the existing very high level of corporate borrowings in India. It is therefore suggested in this paper that interest cost may be disallowed as a deductible expense and a simultaneously, the corporate tax rate may also be reduced in a way that not only the corporate sector's tax burden remains unaltered but also the government does not suffer any loss of tax revenue. In view of the existing corporate tax rate of 60% and interest to profits before interest and taxes ratio of 40%, the proposed tax rate can, thus, be fixed at 36%, disallowing the interest deductibility.