Home >market >mark-to-market >Corporate tax system leaks like a sieve

The finance minister hasn’t tinkered with the corporate tax rates this budget, but neither has he plugged the loopholes in the tax system. The effective tax rates for Indian companies came down in 2012-13 to 22.44% as companies effectively took advantage of the numerous concessions available to them. The effective tax rate is a good 10 percentage points below the statutory tax rate of 32.45% for that year.

In 2010-11, it was 24.1%, the highest in recent times as the government steadily worked towards cutting back on deductions and increasing the coverage of the minimum alternate tax.

But it seems to not have done enough to staunch the leaks in the system. Effective tax rate has been recorded at less than 24% for six of the last seven years.

To be sure, the effective tax rate for the entire universe fell in 2012-13 because a larger number of firms reported losses owing to the economic slowdown. Four out of every 10 firms didn’t make any profit in 2012-13, compared with 37.34% in 2011-12. But the numbers show that the rules continue to favour larger companies and state-owned firms.

The effective tax rate for companies who reported profits before tax (PBT) of more than 500 crore was 20.97% in 2012-13, the lowest among all categories. Moreover, this was the only category among profit-making firms that actually showed a decline in effective tax paid, compared with the previous year.

Conversely, the highest effective tax rate of 26.73% in 2012-13 was recorded for companies with a profit before tax of less than 1 crore.

“This indicates lesser deviance from PBT in the case of relatively smaller companies as compared to larger companies, and that higher tax concessions are being availed of by the larger companies," the budget documents said.

Similarly, public sector firms showed an effective tax rate of 21.49% in 2012-13, compared with 22.78% for private companies.

This gap between the effective tax rates of the biggest and smallest firms has only been widening in recent years. In 2007-08, it was 2.55 percentage points. By 2012-13, it had increased to 5.76 percentage points.

Some pundits describe this budget as encouraging entrepreneurs.

While measures such as a 10,000-crore allocation to promote start-ups that focus on delivering products and services to small- and medium-sized businesses are good, removing the inequity of the tax system would have gone a long way in helping the survival of small firms.

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