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Strong economic growth may be a key reason for rising tax revenue, but the government also gets good marks for nudging up the effective tax rate.

Also See | Exemption RollBack (PDF)

Indian companies list the country’s high corporate tax rate as one key impediment to being globally competitive. But they conveniently omit the fact that few pay taxes at the statutory rate. The budget documents list the effective tax rate at 23.5% in 2009-10, a good 10 percentage points lower than the 34% statutory rate applicable in 2009-10. The effective tax rate is arrived at by dividing the income tax paid by the profit before tax. It does not include the dividend distribution tax.

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Though the gap between the two rates is still significant, the effective tax rate has risen steadily over the years, from a level of 19.3% in 2005-06, despite the maximum rate remaining at almost the same level.

Weeding out exemptions and a gradual increase in the minimum alternate tax (MAT) rate could be the two major reasons for a higher effective tax rate.

The software sector has the lowest effective tax rate of 15-18%. The budget also calculates lost taxes, under the various heads of exemption/deduction. In 2009-10, companies saved an estimated Rs72,811 crore in taxes.

Accelerated depreciation accounts for 40% of lost taxes, since companies can claim a higher depreciation than permitted by company law. Accelerated depreciation is an incentive for capital investment.

The other main components of lost tax revenue are export profits from software technology parks (STPIs), export-oriented units and special economic zones (SEZs), investments in infrastructure sectors, and units set up in the states with tax holidays. The removal of tax benefits to STPIs and ending area-based exemptions are some of the ways in which the government has attempted to plug these lost taxes.

In the budget for 2011-12, documents show that the revenue lost due to deductions given to units in SEZs rose 58% in 2009-10, much higher than the government’s estimate of 19%. While the government has now budgeted for a 21% increase in 2010-11, it fears the actual figures may yet exceed its estimates. But it does not have to worry about this any longer.

By bringing SEZ units and their developers under the MAT umbrella, the government seeks to ensure that the effective tax rate will either remain stable, or continue its upward trajectory, despite the maximum rate declining a bit due to lower surcharge on corporate income tax.

Graphics By Yogesh Kumar/Mint

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