Taxing More Firms At A Lower Rate

Context: Concern over a falling share of corporation tax revenue may get worse.

Falling share of corporation tax: An overview of recent trend.

• Between 2014-15 to 2018-19: A small rise in gross tax revenue in the gross domestic product (GDP) was noticed, from about 10% in 2014-15 to 11% in 2018-19.
• After 2019 till the COVID outbreak: The share of gross tax in GDP fell to 9.88%.
• Impact of pandemic: Gross tax collections further declined to 9.7% of GDP in 2020-21.
  • Tax buoyancy, too, stayed below 1 in as many as four of these seven years and just a shade above 1.5 in the remaining three years.
• Fall in the share of total revenues: From 34% of the Centre’s gross tax revenues in 2014-15 to 28% in 2019-20 and further down to 23% in 2020-21.

Reasons for the decline of corporation tax revenues: Between 2014-2021.

• Low profits: Indian companies’ profits have not seen healthy growth in relation to the economy during this period.
  • For e.g. the combined profit of BSE 500 companies has dropped to 2.31% of GDP, much lower than most other countries, in this period.
  • The net profit of the same group of Indian companies also declined by 15% in dollar terms over the last five years.
• Low taxation rate: This period saw large sections of India Inc enjoying the option of getting taxed at a lower rate subject to their fulfilling certain conditions.
  • For e.g. in 2016-17, new manufacturing companies incorporated on or after March 2016 were given the option to be taxed at 25% plus surcharge and cess (compared to 30% plus surcharge, etc.)
  • This was condition on them not claiming profit-linked or investment-linked deductions, investment allowances, or accelerated depreciation.
  • In 2018-19, the government extended the coverage of the 25% tax rate to cover all companies with an annual turnover of up to Rs 250 crore, benefiting 99% of companies and revenue foregone of about Rs 14,000 crores annually.

Distinct anomaly: While the number of companies to be taxed have increased, this has not resulted in a consequent increase in revenues.

• There were just about 24,000 companies in 2014-15 paying taxes at an effective rate of 25-30%, accounting for only 16% of the corporation tax collected by the government.
• Companies paying taxes at 25-30% numbered around 184,000 in 2018-19, but their share in corporation tax was 19%.
• Impact on revenues: The revenue impact of tax concessions on corporations were estimated at Rs 0.9 trillion in 2019-20, compared to Rs 1.08 trillion in 2018-19, a small increase.

Conclusion: The government’s worry on the corporation tax revenue front is not going to end soon. In fact, it may worsen until the growth engine revives sustainably to make good the loss on account of the lower tax rate.