New corporation tax regime off to flying start

The robust jump in tax collection in 2021-22 has been among the bright spots in a year ravaged by the second and third waves of the pandemic. The Finance Ministry recently revealed that the actual tax collections last fiscal year could exceed the revised Budget estimates by almost ₹5 lakh crore. Much of this growth is thanks to direct tax collections, which in turn was buoyed by strong growth in corporate tax revenue.

There may have been trepidation in some quarters that corporate tax collections could be lower in 2021-22, for it is the first full year for assessment since the radically lower corporate tax regime was introduced in September 2019. Former Finance Minister, Arun Jaitley, had promised in 2015 that he would reduce the corporate tax rate from 30 per cent to 25 per cent over the next four years. He went about the task in a staggered manner reducing the tax rate to 25 per cent for smaller companies first.

But with growth slowing down sharply in 2019-20, corporate tax rate was slashed to 22 per cent for existing domestic companies and to 15 per cent for newly incorporated manufacturing companies in September 2019. The intention was to provide impetus to investment and spur demand. The concessional rate of taxation was subject to the condition that the companies do not avail themselves of any tax incentives or deductions. Companies opting for the new regime were also exempted from the requirement to pay Minimum Alternate Tax.

The Finance Minister had then said that the loss to the exchequer due to this tax-cut bonanza would be a staggering ₹1,45,000 crore. But the tax rate cut seems to have been placed at the ideal spot on the Laffer curve. Not only have the gross corporate tax collections in 2021-22 been 32 per cent higher than the previous fiscal at ₹8.6 lakh crore, larger companies have been quick to shift to the new tax regime. This has helped bring down the effective tax rates for these companies, improved compliance and helped the government finances too.

Migration by droves

Numbers put out in the Union Budget on the number of companies which have migrated to the new corporate tax regime reveal that majority of the larger companies have found it beneficial to shift. For the financial year 2019-20, around nine lakh companies have filed tax returns. Of these around 1.45 lakh companies have filed returns under section 115BAA that allows concessional tax rate of 22 per cent and 1,244 companies have filed under section 115BAB which allows 15 per cent tax rate for new manufacturing companies. While the overall proportion of companies which have migrated may appear small, at 16 per cent, but, only the smaller companies have chosen to remain in the old regime.

Around 8.5 lakh companies, accounting for 94 per cent of the total number of companies, have total income of below ₹1 crore. Only 14 per cent of these smaller or loss-making companies have shifted to new corporate tax regime with 86 per cent remaining in the old tax structure.

But of the companies with total income above ₹50 crore, more than 60 per cent have elected for the new corporate tax regime. Companies with income above ₹50 crore account for 78 per cent of taxable income and corporate tax liability. So, it will be fair to state that most corporate tax payers have given a thumbs up to the new corporate tax regime.

Why did they migrate?

Tax consultants confirm that almost all of their corporate clients have preferred to shift to the new corporate tax system. The main reason for this shift is the attractively low rate of tax, applied uniformly on all companies, whether big or small. With many of the corporate tax incentives and tax preferences being phased out in recent years, companies have had no qualms about shifting. Those with tax credits carried forward from previous years may be biding their time, but most others have moved.

Another factor that weighed heavily with companies is the provision that companies in the new regime are not subject to Minimum Alternate Tax. The simpler tax filing process without the hassle of accounting for various incentives and maintaining multiple books for accounting and for tax purposes, is also said to be an attraction.

Impact of the migration

The new regime has clearly brought down the tax burden on companies. Our analysis of the effective tax rate of Nifty500 companies for the nine-month period ended December 2021 shows an effective tax rate of 22.7 per cent. The tax rate was 24 per cent in the corresponding period of FY21 and 30.7 per cent in FY20.

Despite the reduced tax rates, tax collections have been robust due to the strong growth in profitability of larger companies during the pandemic. While some pockets of discretionary consumption were hit during the pandemic, most companies found a way to sell through online channels and, in fact, benefited from the financial distress among smaller companies.

Going ahead, as profit growth moderates, growth in corporate tax collections can also taper down but the saving on tax incentives can compensate for the revenue reduction. Revenue impact of major corporate tax incentives in 2020-21 was ₹1.03 lakh crore.

New income tax regime

Migration to the new income tax regime has however been rather lacklustre, with very few takers. This appears to be due to the construct of the new regime that is more beneficial for lower income earners. High income earners do not stand to gain much, especially if they are availing/or intend to avail tax incentives for investments, insurance, home loans etc.

Replicating the success of the new corporate tax regime in income tax may therefore be not that easy. But for now, it can bask in the success of the corporate tax regime.

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