Effective corporate tax rates inch up as exemptions are phased out

Stable rates, coupled with a gradual phase-out of exemptions, have seemingly led to improved tax compliance on the part of India Inc.

The latest Receipts Budget shows the effective tax rate paid by 4.28 lakh companies — constituting about 90 per cent of the total corporate returns filed — at 23.53 per cent in 2009-10 (for the 2010-11 assessment year).

The 4.28 lakh companies included 2.5 lakh companies that reported combined profits before tax (PBT) of Rs 8,23,937 crore, but declared a taxable income of only Rs 5,39,408 crore after availing themselves of various breaks and exemption benefits.

As a result, they paid a corporate tax of Rs 1,93,869 crore (inclusive of surcharge and education cess). In relation to the PBT, this worked out to an effective rate of 23.53 per cent, which was below the statutory rate of 33.99 per cent for 2009-10.

However, as the accompanying table shows, the average effective corporate tax rate has steadily risen in recent years — from a level of just 19.26 per cent in 2005-06. Much of this has happened due to the implementation of ‘sunset' clauses on tax holidays for various sectors and erstwhile zero-tax companies being forced to cough up a minimum alternate tax (MAT) on their book profits.

Mr Pranab Mukherjee's latest Budget has ended tax exemptions given under Section 10A and 10B of the Income Tax Act to information technology firms operating under the Software Technology Parks scheme. The Finance Minister has also raised the MAT rate from 18 to 18.5 per cent, while extending this levy to developers as well as units located in special economic zones.

These proposals, along with the proposed introduction of the Direct Taxes Code (DTC) from April 2012, are expected to further plug the gap between the statutory corporate tax rate and the rates companies effectively pay.

“In his last two Budgets, the Finance Minister has tried to align tax principles broadly in line with the DTC prescription of phasing out profit-linked deductions,” noted Mr Aseem Chawla, Tax Partner at Amarchand & Mangaldas.

Already, tax exemptions on profits given under Sections such as 10 (A), 10 (B) or 80-IA (for infrastructure companies) are being increasingly replaced by deductions linked to capital investments, as in Section 35AD.

The Receipts Budget document, interestingly, also reveals inequities in the effective tax rates across companies. While the average rate for all companies was 23.53 per cent, it was higher for those with PBT of less than Rs 1 crore (25.70 per cent), between Rs 1 crore and Rs 10 crore (24.97 per cent) and between Rs 10 crore and Rs 50 crore (23.79 per cent).

On the other hand, larger companies with PBT greater than Rs 500 crore, paid out only 22.55 per cent, with those in the Rs 100 crore-Rs 500 crore bracket shelling out 23.09 per cent. This was clearly a result of the big firms being able to avail themselves of higher tax concessions.

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