BackWhy corporates feel they’re taxed twice for every transaction
India also levies Dividend Distribution Tax (DDT) of 15% on firms paying out dividend to investorsIn 2018-19, for instance, apart from the tax of 30%, companies paid a surcharge of 12% and 4% educational cess
PremiumTaxes on corporates in India aren’t very high, but when combined with various forms of cess and surcharge, the effective corporate tax rate rises to 48.3%. These figures, released recently by Organization for Economic Cooperation and Development (OECD), peg the effective corporate tax rate at double the global average of 24%. OECD’s estimate of effective tax rate is based on a corporate tax rate of 30%, which is levied on companies with annual turnover above ₹250 crore, and the assumption that all profits are distributed as dividend. For firms with a turnover below ₹250 crore, the tax rate is 25%. India also levies Dividend Distribution Tax (DDT) of 15% on firms paying out dividend to investors.
“India levies one of the highest corporate tax rates across major jurisdictions. One serious issue is that any levy, once introduced, is rarely reversed. This can result in double taxation. DDT has not been reversed although tax on dividend income has been partially re-introduced," said Riaz Thingna, director, Grant Thornton Advisory Pvt. Ltd.
In 2018-19, for instance, apart from the tax of 30%, companies paid a surcharge of 12% and 4% educational cess. If all profits are distributed as dividend, DDT is 17.64%. Multinational companies headquartered outside of India pay a higher tax rate, lower surcharge and no DDT.
As always, India Inc. has requested the finance minister to reconsider tax rates and simplify rules. However, this is unlikely, and a KPMG survey found that 46% of corporate India does not expect tax rate to be cut in this budget for large firms. For investors too, the tax regime can be arduous. Long term capital gains (LTCG) tax was re-introduced at 10% for gains above ₹1 lakh in the previous budget. “LTCG tax has been re-introduced but there has been no reversal of securities transaction tax (STT). Consequently, the same trade attracts both LTCG and STT," said Thingna.
In the aftermath of the real estate meltdown, the equity market is one of the few inflation-indexed investment options for the middle class. But multiple taxes on dividend and capital gains have dampened its attractiveness. India is one of the few countries where capital is taxed at so many levels. As per a Mint analysis, the government’s share (in the form of taxes) in one delivery-based transaction accounts for more than 60% of the cost. The other costs are exchange charges and brokerage. “LTCG tax has not brought incremental income to the Centre and should be reconsidered. STT should be raised since it is a guaranteed income unlike LTCG," said Vinay Pandit, head, institutional equities, IndiaNivesh.
Despite multiple levies, tax collection has been slow. Corporate tax collection stood at 17% in 2016-17, but dropped to 11% and 8% in 2017-18 and 2018-19 respectively. India Inc. is now pinning its hopes on a new, simplified direct tax code.
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