Corporates and tax waivers

The Finance Minister has announced that his direct tax proposals will result in a loss of revenue of Rs 11,500 crore a year and the indirect tax proposals in a gain of Rs 11,300 crore.

But then, the Budget papers show that direct tax collections will grow by 19.8 per cent and indirect tax collections only by 16.9 per cent. The tax-GDP ratio is going up and up as can be seen from the Table 1.

The ratio would have been much higher but for the taxes foregone by the government by way of concessions and preferences. The Budget papers show that such tax preferences have doubled from Rs 2.4 lakh crore in 2009-10 to Rs 5.6 lakh crore in 2010-11.

The taxes foregone because of tax concessions amounted to 80 per cent of total expected tax collections and personal income tax concessions alone amounted to 10 per cent of all revenues.

Revenue foregone

The Budget papers also indicate that the tax and duty subsidies are widely distributed and concentrated in the corporate sector (Table 2).

In the field of corporate taxes, revenue foregone related mostly to depreciation and tax concessions and Software Technology Parks. Special Economic Zone accounts for substantial revenue. Despite all the tall talk about the need to eliminate exemptions, the government has found it difficult to abolish the same.

In the field of personal income tax, boost to savings and encouragement for savings instruments accounted for tax give-aways.

Effective Tax Rates

The nominal corporate tax rate in India has been 33.2 per cent. The rate in other countries is much lower as can be seen from the data given below: Singapore – 17 per cent; Taiwan – 20 per cent; China – 25 per cent; Malaysia – 25 per cent and South Korea – 24 per cent

India is not able to reduce nominal tax rates. The government is quick to point out that no company pays this nominal tax rate.

A study of returns filed by 4.27 lakh companies by the end of December 2010 shows that the effective tax rate was only 23.53 per cent. Here also, it is the smaller company that gets affected.

Companies with profits up to Rs 1 crore end up with an effective tax rates of 25.52 per cent. Companies with profits of over Rs 500 crore pay 22.05 per cent.

One way of raising the effective tax rates will be to harmonise the depreciation rates in the Income-Tax law with those found in the Company Law.

Both the Company Law Bill and the DTC Bill are before Parliament. Some way should be found to link the depreciation rates in the two statutes.

Tinkering with Rates

Finance Bill 2011 keeps the tax rates for companies constant at the same level as before. Surcharge, however, is reduced. Domestic companies will hereafter pay 5 per cent surcharge instead of 7.5 per cent. Foreign companies will pay 2 per cent instead of 2.5 per cent.

There will thus be a marginal reduction in the overall corporate tax rates.

The nominal tax rate for domestic companies will henceforth be 32.45 per cent instead of 33.23 per cent. For foreign companies, the rate will be 42.02 per cent instead of 42.23 per cent. The Dividend Distribution Tax will get reduced from 16.61 per cent to 16.22 per cent.

This small reduction in surcharge need not necessarily benefit all companies. There is a change in the levy of Minimum Alternate Tax. It is raised from 18 per cent to 18.5 per cent. This will mean a rate of 20.01 per cent for domestic companies as against the rate of 19.93 per cent hitherto.

The MAT rate goes up from 19.44 per cent to 19.53 per cent for branches of foreign companies. The reduction in surcharge is thus offset by the higher MAT rate.

MAT to stay

The revision in the MAT rate is now on par with the MAT proposed in the DTC Bill. MAT will also impact the Special Economic Zones. Developers and units in SEZs will now have to pay MAT at 20.01 per cent and also DDT at 16.22 per cent on dividends distributed from SEZ profits.

These changes indicate that MAT has come to stay. Any hope of withdrawing MAT in the foreseeable future will die a natural death. The government is unlikely to come up with a scheme for withdrawal of concessions to corporate houses by way of altering the exemption provisions.

At the same time, it will cry foul that the effective tax rate is far below the nominal tax rate.

No wonder, captains of industry never fail to welcome any budget proposal as long as the budget does not thinker with tax exemptions. The arrangement seems to suit both the corporate houses and the Government of India.

(The author is a former Chief Commissioner of Income-Tax.)

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