Has India’s corporation tax gamble paid off yet?

From being raised to 45% in India’s historic budget of 1991, to now just around half of that, corporate tax rates in India have come a long way and are now indeed more competitive globally. A massive cut announced in 2019 effectively resulted in a 10-percentage-point drop in the tax rate, further reducing the burden on companies. The effective tax rate among Indian companies has now fallen below even the statutory concessional rate, a Mint analysis shows. Larger firms have benefited the most with a lower tax rate as they have availed more deductions and incentives or have shifted to the new lower tax regime. Such giveaways have, of course, come at a cost to the Centre. Meanwhile, the initial objective of freeing up corporate money to push jobs and investments remains unmet.

How much tax do Indian companies need to pay?
25% of profits for domestic firms with < ₹ 400 cr gross turnover; 30% for those with higher turnover (excludes surcharge).

But do all companies pay these tax rates?
No, because they also avail various exemptions and deductions. The actual tax outgo as a percent of profits is called effective tax rate.

2019-20: The year that saw major tax cuts. One, more companies came under the 25% bracket, and two, a lower 22% rate (25.2% including surcharge and cess) was given to firms forgoing all exemptions/incentives.

26%: Corporate tax's share in Centre's gross tax collections in 2021-22, down from 32% in 2018-19

21%: Top 50 profit-making listed companies' share in total corporate tax collected by the Centre in 2021-22, shows a Mint analysis

₹1.5 trln+: Revenue hit for Centre after it cut corporate tax rates in 2019

The kitty bounces back

The adverse impact of the pandemic on businesses and the 2019 tax rate cuts pushed the collection of corporate tax below that of personal income tax for the first time in over a decade in 2020-21. But it has seen double-digit growth since then, and has regained its lead. As a share of GDP, corporate tax mop-up returned to around 3% after a lull, but it's a far cry from the five-year high of 3.5% in 2018-19.

Competitive edge

Indian companies have to pay a lower statutory tax rate than companies in some other emerging economies such as Brazil, Argentina and Mexico. This adds to India's competitiveness in terms of attracting foreign flows.

Unequal benefits

The effective tax rate for Indian companies has been on a decline. After the 2019 cuts, companies are effectively paying a smaller share of profits as tax than even the statutory rate. Larger companies are paying even less, just about 22%, implying an unequal burden, a Mint analysis shows. These companies are either availing higher deductions and incentives or have shifted to the new lower tax regime.

Tax giveaways

The Centre's revenue foregone due to deduction or exemptions under the Income Tax Act availed by corporates has grown over the last seven years barring the years of the pandemic.