In his Budget speech in February this year, finance minister Arun Jaitley talked about his promise from 2015 to reduce the corporate income tax (CIT) of companies with a turnover of more than Rs 10 crore and less than Rs 50 crore to 25%. “This benefitted 96% of the total companies filing tax returns in 2016-17,” he said.
He proposed to extend the reduced rate to companies with a turnover of up to Rs 250 crore for the next year: “This will benefit the entire class of micro, small and medium enterprises (MSMEs) which accounts for almost 99% of companies filing their tax returns,” he said.
“The estimate of revenue forgone due to this measure,” he had said, “is Rs 7,000 crore during the financial year 2018-19. After this, out of about seven lakh companies filing returns, 7,000 companies … whose turnover is above Rs 250 crore will remain in the 30% slab.”
“The lower corporate income tax rate for 99% of the companies will leave them with higher investible surplus which in turn will create more jobs,” he had predicted.
The receipts budget, however, provides a more accurate picture: Just more than half of all companies – i.e. 54.32% or 3,30,730 in absolute numbers – reported Rs 14,76,399 crore turnover and a total income of Rs 10,10,993 crore; 2,60,194 companies (42.74% of the sample) reported Rs 6,34,283.38 crore as losses and 17,912 companies (2.942%) reported no profits.
The same document notes that Rs 85,026.11 crore were waived in tax breaks for all corporates who had filed returns by November 2017 – a sample of 6,08,836 tax files. Jaitley’s projected figure for revenue forgone for MSMEs in the speech was Rs 7,000 crore.
But if the effective tax rate (ETR) for companies – or the actual, lower rates after the long list of deductions, exemptions and credits available to businesses from the government – are accounted for, the tax bills look very different depending on size.
For businesses whose revenue was Rs 100 crore to 500 crore, the ETR was about 29%, close to the statutory rates. But companies that paid an ETR of between 25-30% – 78,022 in number – had a share of 11.27% in total corporate profits, a 12.77% share in total income and an 11.95% share in total tax liability.
As such, India’s headline CIT is 34%, among the highest in the world. (table below). But the freebies given to large corporates have only risen.
For instance, in 2012, companies with revenues greater than Rs 500 crore contributed 58% of the country’s share in profit before tax (PBT), while their part in total corporate income tax was about 54% at the ETR of 22.59%, and about 26% for businesses whose revenue was less than 10 crores.
In FY 2016-17, undertakings with PBTs exceeding Rs 500 crore accounted for a total of 61.17% of the total corporate PBT – the largest share of the country’s corporate revenue – but only 54.45% of its corporate income tax liability. And, only 335 companies reported such revenues from the sample, and paid an ETR of only 23.94%.
Further, the overall ETR fell to 26.89% in 2016-17 from 28.24% the previous year (FY 2015-16), and the biggest discounts went to the biggest businesses.
While firms which reported PBT of Rs 500 crore and above paid an ETR of 23.94% in FY 2016-17, it was 29.43% for companies with PBT up to Rs one crore, closer to their statutory rates, the result of the phasing out of profit-linked deductions and the levy of minimum alternate tax (MAT) for them.
In sum, overall ETRs fell to 26.89% from 28.24% in the previous financial year 2015-16 but benefited the largest companies the most.
By another matrix, 3,45,566 companies, about half of the total sample, with average ETRs of up to 20% accounted for a quarter – or 24.17% – of total PBT, 9.39% of total taxable income and 10.14% of total taxes. In other words, a large number of companies contributed disproportionately lower taxes in relation to their profits.
In addition, 39,121 companies accounting for 6.44% of the total profits and 16.10% of the total taxes, had an ETR approximately equal to the average ETR of 34.38%. This shows that the tax liability across enterprises was unevenly distributed, “primarily due to the various tax preferences in the tax statute,” the receipts budget, said.
This too indicates higher tax concessions are being availed by the larger companies.
Big discounts for big business
The receipts budget confirmed the statutory rate was 30.9% for revenues of up to a crore; rising to 33.06% for those who made taxable sums of up to Rs 10 crore, and 34.61% for companies whose income exceeded Rs 10 crore.
The ETR in 2016-17 of the entire sample was 29.69% (including dividend distribution tax) in the current receipts budget, as against the 28.24% reported in the financial year 2015-16.
While the statutory tax rate was 30.9% in case of companies having incomes of up to Rs one crore, it was 33.06% for those with incomes up to Rs 10 crore and 34.61% for companies with revenue exceeding Rs 10 crore, resulting in an average statutory rate of 34.38%.
Tax policy distortions
The report on forgone revenue, presented as a separate document, was placed with the Union Budget until 2007-08. Earlier called ‘Statement of Revenue Foregone’, it was renamed ‘Statement of Revenue Impact of Tax Incentives under the Central Tax System’ in 2014, then merged in the Receipts Budget in 2016-17, usually published mid-year.
But presenting the statement of tax revenue forgone was postponed because, the budget document explained, corporate tax exemptions will be phased out gradually; tax exemptions on imports are not reclaimable because they are related to India’s Free Trade Agreements that cannot be repudiated, while some tax exemptions were expected to be replaced by GST.
“Moreover, it is possible that some of the current indirect tax exemptions benefit the poor,” the report said.
Public vs private rates
The report also compares the ETRs of public sector companies (PSUs) with that of private companies. While the rate is lower than the statutory rate for both categories, the private sector companies pay a slightly larger proportion of their profits as tax than the public sector companies.
While the headline rates for both private and public sector companies are lower than the headline 34%, the private sector pays a larger proportion of its profits as taxes than the public sector.
Even the manufacturing and service sectors had ETRs well below the 34% statutory mark, at 24.75% and 28.73%, respectively.
But labour-intensive sectors such as hotels and restaurants, retail and wholesale trade, faced relatively high effective rates, which runs counter to the objective of promoting job creation.
Sector-wise spikes and lows
There was much diversity of effective rates across and within sectors for the FY 2016-17. The cement (20.7%), sugar (18.04%), steel (17.87%), are in the lower ranges in the manufacturing sector; leasing companies in the financial services sector (21.47%); and film distributors (21.52%) in the entertainment sector.
Among the highest taxpayers was the print and publishing sector at 34%, but mining contractors paid an ETR of 44%; Chartered accountants who help corporates lower their tax bills–more sinned against than sinning–themselves paid a relatively higher ETR at 33%.
An OECD study said tax concessions introduce economic distortions across firms of different sizes, as large companies – “that can more easily afford specialist tax advice – are better able to exploit tax concessions.”
For instance, accelerated depreciation which allows greater deductions on assets expected to be more productive in their early years costed the Indian exchequer Rs 370 billion – 8.2% of CIT revenue forgone – or 0.3% of GDP in FY 2014-15. It is the single most expensive subsidy given to companies to minimise taxable income. Large companies favour accelerated depreciation even if it impacts the bottom line adversely as the cash saved can be reinvested or paid to shareholders.
Tax benefits to different sectors vary greatly. The healthcare industry, for instance, benefits from relatively high depreciation for medical equipment, it has income tax exemptions for five years for rural hospitals, receives customs duty exemptions for imported equipment that are lifesaving and an income tax exemption for health insurance.
The actual ETR is higher for small, labour intensive and private companies. Hotels and restaurants pay the most, as per OECD statisticians.
Area-based exemptions such as for SEZs and tax relief for infrastructure firms (telecom, oil, electricity, and distribution and network firms) account for the rest of the forgone revenue.
Rahul Bhasin, managing partner at Baring Private Equity, a funds advisor managing $1.1 billion across 53 investments who recommends giving the highest taxpayers red battis for their cars, also favours per capita-linked tax rates at 5% to 35%, Aadhaar-linked tax declaration and takes a sense of pride in being a taxpayer.
He says corporate tax rates should be set at 15% giving no exemptions: “Remove dividend distribution taxes. Set fines for all misdemeanors and financial penalties with no exemptions and a 3x fine on under-declaration.”
But inconsistencies caused by “large favours for large corporates may be seen as subsidies to preferred tax payers.” Critics of this approach say a “tax policy should not only be efficient but also transparent.”
The government had committed to a “base broadening-rate reducing reform where CIT will be lowered to 25% over a five-year period and most tax concessions will be eliminated”.