Taxed at a significantly lower rate following the introduction of the concessional tax regime in 2019, India’s largest corporates may have saved over ₹3 lakh crore in tax payments since then. This is in addition to over ₹8 lakh crore in revenue foregone through various deductions granted to companies in the decade since 2012-13 (FY13).

Experts note that while the tax cuts point towards the need to rationalise tax incentives, a decline in corporate tax-gross domestic product (GDP) ratio could limit the government’s ability to finance additional development expenditure.

Until 2019, a corporate tax rate of 25% was levied on domestic companies with an annual turnover of up to ₹400 crore. It was 30% for the rest. The new tax regime slashed the rate to 22% as long as the companies forgo certain deductions under the Income Tax (IT) Act. In addition to this, tax rates for new manufacturing companies were lower, provided they fulfilled certain conditions.

Suranjali Tandon, Associate Professor at NIPFP, explains that the new tax regime is indicative of a preference for a “simpler tax system with lower rates” as corporate tax rates have undergone changes at different points before to align with the country’s economic priorities.

“However, there is no consensus on the optimal corporate tax rates as this may vary as per economic circumstances and context,” she says.

R. Nagaraj, Distinguished Senior Fellow at IIT Bombay, argues that a reduction in corporate tax rates mainly serves the “class interests” of the “business community” — evident in the simultaneous increase in luxury consumption. “This is the standard Laffer curve argument which was popular during the Reagan administration in America. But we do not have any evidence of this working anywhere in the world, especially not in India.” To get a sense of the amount saved in taxes as a result of this incentive, data of India’s largest companies, those on the BSE 500 index, were considered, which were sourced from the Capitaline database.

So, until FY19, The Hindu’s analysis shows, the effective tax rate for these companies, which is the average rate at which the profits (before taxes) of corporations are taxed, was 30% or higher. The ratio declined in the subsequent years, and touched a low of 21.2% in FY24. Moreover, the top 10% of the BSE 500 companies continued to enjoy lower effective tax rates compared to the overall average for all companies, even as the gap has considerably narrowed in recent years.

Table 1 shows the effective tax rate (in %)

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“As large companies opt for the new regime, the lower effective tax rate is expected,” says Prof. Tandon.

In absolute terms, this could have translated into a tax saving of roughly ₹3.14 lakh crore for these companies since FY20.

The figures were estimated by calculating the compound annual growth rate (CAGR) in taxes paid by companies in the five years ending at FY19 (which was 11.5%) and also assuming a similar rate of growth for the subsequent years until FY24 had the tax cuts not been introduced, provided all other factors remained constant (Table 2).

Table 2 shows the tax data for BSE500 companies for which figures were available^

Company profits grew at a much slower pace at 10.4% in the five years ending at FY19. In the five years since FY20, however, company profits have grown at a rate of 32.5% while corporate taxes paid by these companies have done so only by 18.6%.

Apart from tax rates and profits, the level of economic activity also influences corporate tax collections, says Zico Dasgupta, Assistant Professor of Economics at Azim Premji University.

While the intent behind such changes was to encourage private investment, create jobs and “establish a globally competitive business environment for certain domestic companies”, Prof. Dasgupta says there is little evidence to suggest that tax incentives make businesses more competitive.

But since tax concession also means forgone expenditures by the government, it seems to me that the more important policy question pertains to a cost-benefit analysis of providing greater tax concession.”

He says, “The corporate tax concessions announced in the pre-COVID-19 period do not seem to be based on such considerations.”

Prof. Tandon notes that since the incentives coincided with the pandemic, the evidence to suggest increased private sector investments due to rate cuts is “mixed”. “Nevertheless, the profitability of companies has allowed them to create reserves and to invest in current assets. In part, the anticipated demand can influence the decision to make capital investments.”

Companies also avail tax concessions in the form of deductions under various sections of the IT Act. For instance, tax incentives are granted on donations made to charitable trusts, contributions to political parties, expenditure on scientific research or on profits of undertakings set-up in north-eastern States among others. The government calculates the revenue impact of such concessions in the Budget document each year and this is done for a larger database of over 10 lakh companies.

Revenue forgone due to such deductions amounts to ₹8.22 lakh crore in the decade ended FY22 (latest data). The data show an underestimation of the revenue impact in six of the ten years considered (Table 3).

Table 3 shows the revenue impact of major tax incentives for corporate tax payers (in Rs. crore). It also shows the projected revenue impact (in Rs. crore). The data show an underestimation of the revenue impact in six of the ten years considered.

With inputs from Sindhu Hariharan

Source: Budget documents, Capitaline

samreen.wani@thehindu.co.in