Headline : Reduce corporate tax to achieve $5 trillion economy Editorial 8th Aug’19 IndianExpress
The 2015 budget proposal of reducing Corporate Tax (CT):
- In the 2015 Budget speech, the union minister announced that India is considered as having a high Corporate Tax (CT) regime but the government does not get that tax due to excessive exemptions.
- The minister proposed to reduce the rate of Corporate Tax from 30% to 25% over the next four years.
- He said the process of reduction will be accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes.
Process of tax reduction:
- The process of tax reduction started in FY17, with a small reduction of 1% for companies whose turnover was less than Rs 5 crore, and announcing a CT of 25% for new manufacturing companies who do not avail of any exemption.
- In the 2018 Budget proposal, the 25% rate reduction was extended to MSME’s with annual turnover up to Rs 250 crore.
- In the 2019 full budget, the finance minister widened the eligibility for the lower rate of 25% to include all companies having annual turnover up to Rs 400 crore.
But highly taxed companies got no cuts:
- The reduced rate of 25% CT will now cover 99.3% of the companies. Only 0.7% of companies will remain outside this rate.
- The 0.7% of the companies in India outside the reduced rate actually contribute about 79% of the total CT.
- Two years after the CT reduction began, about 68.5% of the total CT was contributed by a miniscule 0.2% of all companies.
- The Receipt Budget 2019-20 reveals that a small number of companies, 373, with profits before taxes (PBT) of Rs 500 crore and above, contributed 52% of CT in FY18 and 16.35% of CT was contributed by 1,236 companies with PBT of Rs 100-500 crore.
- The expectation was of reduction in CT to 25% for all companies, based on the promise by the FM in his 2015 budget speech remains unfulfilled.
Effective Tax Rate (ETR) is higher than before:
- The Effective Tax Rate (ETR) and the average statutory CT in FY18 is the highest in the past five years for all companies.
- The ETR is 29.49% for FY18, compared to 23.22% in FY14.
- This ETR increase has contributed Rs 1.11 lakh crore out of Rs 5.24 lakh crore collected as CT.
- In fact, the government has phased out profit linked deductions without proportionately reducing the CT, while imposing 2% additional surcharge from FY16.
- The ETR for large companies has consequently increased from 20.68% in FY14 to 26.3% in FY18, a 27% increase.
Large companies in the services sector taxed more:
- Large companies in the services sector are the biggest employers in India.
- They provide stable jobs at good remuneration.
- However, the services sector, which is more job oriented, has a 2.7% higher ETR at 30.55% in FY18 compared to 27.83% in the manufacturing sector, which adopts capital intensive automation and enjoys tax incentives.
- This implies that India incentivises automation and taxes job creation more.
Indian CR is higher than in any country:
- A study on the CT around the world in CY 2018 reveals that the worldwide average statutory CT to be 23.03%, measured across 208 tax jurisdictions.
- The average statutory CT is 21.86% among EU countries, 23.93% in OECD countries and 27.63% in the G7, while the US has a combined statutory rate of 25.84%.
- India’s average statutory CT at 34.4% in FY18 is higher by more than 10% compared to the worldwide average statutory CT.
Impacts India negatively:
- The Finance Minister had also announced, in Budget 2015, his vision of putting in place a direct tax regime which is internationally competitive on rates.
- Instead of India being internationally competitive in tax rates, it has the highest CT among the large economies in CY18.
- The high CT in India is negatively impacting the competitiveness of Indian multinational companies, and India as a destination for investment.
- When overseas investors come to India with a much lower cost of capital, Indian entrepreneurs cannot compete with a much higher cost.
- Despite promises by the Finance Ministers, the CT reduction is not provided to all companies but only to MSMEs.
- Tax collection has increased hugely by reduction of depreciation rates and withdrawal of corporation taxbreaks.
- India has the highest CT among large economies, making its direct tax regime most uncompetitive internationally.
- The quantum of tax litigation in India has gone up considerably at all levels too.
Way ahead – Reduction in the CT should be for all companies:
- A reduction in the CT of all companies to 25%, and not just for MSMEs, will enable large companies to compete globally.
- A reduction in the CT will reduce the cost of credit from the banking system over time and make the job-intensive services sector more competitive.
- This will increase their growth leading to higher employment, better quality jobs, and reduce the high cost of capital in India.
- This will support India becoming a $5 trillion economy.
GS Paper III: Economy