The Union Budget for 2021-22 did not give away much for the corporate tax payer, with the dramatic slashing of corporate tax rates already done in September 2019. The impact of this move is yet to be seen, since the returns for FY20 are yet to be filed, but the ‘revenue foregone’ document in the receipt budget of 2021-22 shows that the tax burden on larger companies has increased since 2014. There is, however, minor relief for smaller companies.
About 8.85 lakh companies filed returns with the I-T Department up to November 2020 for the assessment year 2019-20. The effective tax rate for this universe was 27.81 per cent. This is way higher than the overall effective tax rate of 23.22 per cent in FY14.
In his maiden Budget, Arun Jaitley had acknowledged that corporate tax rates in India are among the highest and had promised to pare it to 25 per cent over the years. He went about it in a phased manner, cutting the tax rate for new companies and those with turnover below ₹5 crore in Budget 2016. In the next two Budgets, he lowered it to 25 per cent for companies with annual turnover up to ₹250 crore.
Smaller companies seem to have benefited by this reduction of rates. For the 3,77,730 companies that reported profit under ₹1 crore in FY19, the effective tax rate was 26.57 per cent — slightly lesser than the 26.89 per cent in FY14. Of the total companies that filed returns for FY19, 8.3 lakh companies, or 94 per cent, have seen a reduction in their tax outgo between FY14 and FY19.
But medium and large sized companies have witnessed an increase in tax incidence. This is due to the increase in surcharge of 10-12 per cent on companies with annual income over ₹10 crore in 2015. In 2018, a higher rate of health and education cess added further to the burden. Larger companies have also been greatly hit by the phasing out of incentives.
Effective tax rate
The effective tax rate for companies with a turnover of over ₹500 crore increased to 25.91 per cent in FY19 from 20.68 per cent in FY14. Companies with a turnover of ₹10 crore to ₹500 crore have also witnessed a large jump in their tax outgo over the last five years.
The effective tax rate for all companies was slashed to 25.17 per cent inclusive of all cesses and surcharges in September 2019, provided they chose to forego all the incentives and deductions. With many companies still enjoying tax incentives or having carry-forward losses, it is not clear if many have opted to shift to the new regime.