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Business News/ Market / Mark-to-market/  Tax rates not a major hurdle to Make in India
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Tax rates not a major hurdle to Make in India

Effective tax rate for companies is already low and manufacturing has seen rates decline more than it has for services

The answers to reviving growth in manufacturing lie in areas other than lowering tax rates. Photo: Bloomberg (Bloomberg)Premium
The answers to reviving growth in manufacturing lie in areas other than lowering tax rates. Photo: Bloomberg
(Bloomberg)

Is Indian industry justified in demanding lower corporate tax rates? One way to consider this demand is by looking at the effective tax rate (ETR), data on which is put out by the government along with the national budget documents. The past five years have actually shown a decline of 40 basis points in the rate to 22.4% in 2012-13, the latest year for which data is available. A basis point is 0.01%.

The decline is favourable for the industry. That’s not all. The journey to this reduction shows an increase at first, from 22.8% in 2008-09 all the way to 24.1% in 2010-11, and then falling consistently and sharply to its current level. Not only is the trend declining, but it is also far below the statutory tax rate of 33.99% that includes cess and surcharge.

In 2012-13, if we look at the tax incidence on the top 15 manufacturing sectors by profit, the top sectors by ETR include ones such as engineering goods, tobacco and agro-based products, while the lowest ETR sectors include power and energy, fertilizers and chemicals, and steel and cement. The range of ETR in these sectors starts from as high as 28.1% to as low as 13.7% (see chart). In fact, for these top 15 sectors, the average ETR is as low as 19.7%.

ETR for companies is already low and manufacturing has seen rates decline more than it has for services. That lightens the pressure on the government to reduce tax rates to get manufacturing going. The answers to reviving growth in manufacturing lie in areas other than lowering tax rates.

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Published: 26 Feb 2015, 10:49 PM IST
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