While the Modi government can take pride in having pushed through the landmark indirect tax reform, it has fallen short in its efforts to rationalise corporate tax rate in the country. To give Finance Minister Arun Jaitley his due, he had pointed out in the Union Budget presented in 2015 that the corporate tax rates in India are too high when compared to those in other countries and there is widespread tax evasion, with larger companies paying lower taxes than smaller ones.

He had also gone on to lay a roadmap for bringing down the corporate tax rate in the country from 30 per cent to 25 per cent over the next four years.

It’s a roadmap that was flashed briefly in the next three Budgets as the corporate tax rate was lowered to 25 per cent, but only for some companies. The Centre was restrained by the fact that it had little leeway to forego tax revenue. It, therefore, tried to lower the burden for maximum number of companies, with minimum loss to the exchequer.

But in this exercise, larger companies — with turnover exceeding ₹250 crore — have not seen any change in the tax rate. These are the companies that account for a largest chunk of the economic output and also the Centre’s tax revenue. The tax burden for these companies has in fact moved higher. Corporate tax rate for larger companies has moved up from 33.99 per cent in 2014 to 35 per cent by 2018, if the hikes in surcharge and cess are taken into account. Withdrawal of some of the corporate tax incentives is also increasing tax incidence for larger companies.

While it is true that the Centre will find it difficult to push through large cuts, the next government that comes to power should take this as one of its priorities in order to kick-start the flagging private investment cycle.

Global comparison

According to data compiled by KPMG, countries across the globe are moving towards lower corporate tax rates. The average corporate tax rate globally has declined from 30.19 per cent in 2003 to 20.6 currently. The average Asian rate declined from 29.42 per cent to 23.03 per cent in the same period.

The current peak corporate tax rate in India, at 35 per cent, is the highest among the BRIC as well as the Asia-Pacific countries. Brazil is the only other country in this group with tax rate higher than 30 per cent — at 34 per cent.

It’s clear that tax on income of companies needs to gradually slide lower so that the surplus available to invest in capacity expansion and augmenting business, increases. Indian Governments in the past have also been mindful about this need. Corporate tax rate in India moved down from 36.75 per cent in 2003 to 32.44 by 2011, only to move higher in subsequent years due to hikes in surcharge and cess.

Tax rate changes

A back-of-the-envelope calculation shows that a 5 percentage point reduction in corporate tax rate for all companies would have resulted in a revenue loss of around ₹95,000 crore in FY19. Given the inability of GST to reach its full potential in garnering tax revenue yet, the Centre is in no position to slash corporate tax rates as of now.

It has instead adopted a calibrated approach to rationalising rates, in a bid to please the largest number of companies.

In the Union Budget of 2016, Jaitley gave new manufacturing companies incorporated on or after March 2016 the option to be taxed at 25 per cent if they did not claim any profit- or investment-linked deductions, investment allowance and accelerated depreciation. He also lowered the corporate tax for companies with turnover less than ₹5 crore in FY15 by one percentage point to 29 per cent.

In the following Budget, he brought down the income tax for companies with annual turnover up to ₹50 crore to 25 per cent. This was expected to impact close to 6.67 lakh companies, accounting for 96 per cent of companies filing returns. The impact on the exchequer was expected to be ₹7,200 crore per year.

In 2018, the 25 per cent rate was extended to companies with reported turnover up to ₹250 crore in FY17. With this, 99 per cent of companies filing tax were moved to 25 per cent rate and the estimated revenue foregone was ₹7,000 crore in FY19.

What’s caused the increase

While rates were lowered for smaller companies, 7,000 of the larger companies which have turnover in excess of ₹250 crore have been outside the ambit of these rate cuts.

These companies would also have been affected by the phasing out of some corporate tax incentives. For instance, the claim for accelerated depreciation was limited to 40 per cent from FY18, the deductions for research was limited to 150 per cent from April 2017 and 100 per cent from April 2020.

The larger companies would also have been hurt by the increase in surcharge and cess. In 2015, the surcharge rate was increased from 10 per cent to 12 per cent for companies with income over ₹10 crore. In 2018, the higher rate of health and education cess at 4 per cent, added further burden.

Another reason behind the increase in tax payments by larger companies could be heightened surveillance on creative tax planning through low tax offshore jurisdictions, after the adoption of many of OECD’s BEPS (Base Erosion and Profit Shifting) rules in India. The CBCR (country-by-country reporting) was adopted by India from 2016 wherein multinational entities have to provide details about the operations of the group companies in all parts of the globe along with financial numbers to tax authorities.

Time to bite the bullet

While the Centre has been trying to ward off the impending cut in corporate tax rate for larger companies, it needs to do so soon.

Reduction in rates for smaller companies may be beneficial to these entities, but is unlikely to have the impact that similar cuts for larger companies is likely to have in boosting private investments.

It’s true that corporate taxes account for around one-third of total tax collections and the Centre is banking on a healthy growth of around 13 per cent in corporate tax collections in FY20 to shore up its fisc.

But instead of trying to increase revenue by holding higher rates, it could try to reduce rates, which, in some circumstances, can result in higher compliance.

This combined with greater scrutiny by tax authorities could help improve collections.

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