Corporate tax contribution to gross tax revenues peaked at close to 40% in 2009-10. In the 2016-17 budget estimates, they are expected to contribute only 30.3% of total tax collections.
To be sure, corporate profits have risen only marginally in the past few years, while contribution from other sources such as excise on oil products has perked up. Still, a drop of 9 percentage points in the corporate tax contribution shows the inefficiency of the tax system.
While the corporation tax rate is 30% plus surcharges, the effective tax rate—after adjusting for exemptions and allowances—was just 24.67% for 2014-15, the last year for which data was available. That, however, is an improvement over the previous year’s 23.22%, while still being 9 percentage points below the maximum statutory tax rate of 32.445%.
The receipts budget document says this improvement came about owing to “gradual phasing out of various profit-linked deductions and the levy of Minimum Alternate Tax (MAT) on companies".
Just as in life, in the corporate tax system too, it’s the small guy who cops it on the chin. The effective tax rate for firms which make less than ₹ 1 crore in annual revenue is 29.37%, almost 3 percentage points higher than a year ago.
Thus, not only are these firms suffering the most from the downturn—in terms of sales growth and profit growth as a previous column showed—they are also paying higher taxes on their profits compared to big business.
Consider this statistic: Firms which contributed to 60.6% of total profits in the finance ministry’s sample for this study paid tax at an effective rate of 22.88%. The gap between the effective tax rates of the biggest and smallest firms widened to 6.49 percentage points in 2014-15, compared to 2.55 percentage points in 2007-08.
The phasing out of tax exemptions announced in this budget should help reduce the gap, as will the measure to reduce the tax rate by 1 percentage point for companies with sales below ₹ 5 crore.