Despite no major tax tweaks, India Inc never had it so good

Corporate India saw a decline in the proportion of profits paid out as taxes during 2018-19, though there were no significant industry-wide changes in the overall statutory tax rates for that year, the Budget 2020-21 documents show.

The effective tax on profits of companies, or the actual taxes paid after availing of various exemptions and deductions allowed in the Income-Tax Act, 1961, dipped about 165 basis points in 2018-19 to 27.84 per cent from the preceding year.

The effective tax rate for all companies was at 30.4 per cent when the Dividend Distribution Tax (DDT) was included, but that was also much lower than the statutory tax rate of 34.6 per cent, which included all cesses and surcharges.

Corporate entities that had annual pre-tax profits of ₹10-50 crore saw their tax liability dip the most, as the Centre lowered the statutory tax rate for companies with annual turnover of up to ₹250 crore to 25 per cent in the 2018-19 Budget.

The effective tax rate for such small companies consequently declined by 141 basis points to 27.68 per cent. Despite that decline, their effective tax rate continued to be higher than the 26.01 per cent paid by the companies with pre-tax annual profits in excess of ₹500 crore.

The effective tax rate for large companies fell just 29 basis points in 2018-19.

It may be noted that larger companies manage to lower their tax liability by taking advantage of various exemptions and deductions allowed in the Income-Tax laws, something that smaller companies are unable to do.

The data in the Budget documents also shows that companies that reported pre-tax profits of ₹100-500 crore experienced the smallest decline in their effective tax rate, falling just about 18 basis points, to 28.44 per cent.

Rise and fall of tax rates

The effective and statutory tax rates for corporate entities climbed steadily after 2012-13, as the Centre imposed more cesses and surcharges on businesses and withdrew certain exemptions and deductions. Earlier, the effective tax rate had dipped from 24.1 per cent in 2010-11 to 22.44 per cent in 2012-13, while the statutory rate declined from 33.21 per cent to 32.44 per cent. By 2017-18, the effective tax rate had risen to 29.49 per cent and the statutory rate to 34.4 per cent.

Significantly, the fall in effective tax rate in 2018-19, even as the statutory tax rate climbed 20 basis points, has widened the difference between effective and statutory tax rates of companies. That difference for 2018-19 was estimated at 6.76 percentage points, which narrows to 4.18 percentage points when the dividend distribution tax is included.

The gap between the effective and statutory rates had narrowed dramatically in 2017-18, and the reversal in the narrowing seems in-line with the trends of the previous years. The gap was the widest in 2009-10 if the effective and statutory rates for the preceding 10 years were considered. The statutory tax rate that year was 33.99 per cent while the effective tax rate was 23.53 per cent, and after including the dividend distribution tax, it was 25.06 per cent.

Cos in highest tax bracket fall

The Budget documents also show that the proportion of companies paying effective tax in excess of 33 per cent had been gradually shrinking since 2014-15, a year that saw a spurt in the number of companies paying taxes at the highest rate.

The data on tax returns filed till November 31, 2019, shows that only about 4 per cent of those companies were paying taxes at the rate above 33 per cent. Similarly, the share of companies paying effective taxes of 30-33 per cent is down to only about 6 per cent.

The companies reporting an effective tax rate of 30 per cent or more declined to about 10 per cent from over 23 per cent in 2016-17, while the share of companies with effective tax rate of 25-30 per cent climbed steadily after 2015-16, rising from 4.6 per cent of the companies to 20.9 per cent.

Another notable observation is the sharp rise in the number of companies that had an effective tax rate of zero or even less. Of the 7.91 lakh companies that had filed their returns till the end of November 2019, 4.35 lakh, which is 55 per cent of the tax return filers, had an effective tax of zero or less. Between 2014-15 and 2017-18, that proportion was about 45 per cent of companies filing their annual returns.

Larger firms pay higher share

As in the previous years, companies paying taxes at the rate of 30 per cent or more accounted for a higher share of taxes collected from the corporate sector, at about 58 per cent. However, the total number of companies that pay taxes at that rate has declined over the years, even as the total number of companies filing tax returns had grown.

In 2018-19, 75,075 companies were liable to pay taxes at 30 per cent or more, down from 142,717 companies two years earlier. Effectively, fewer companies now account for a larger share of taxes on corporation income collected by the Centre.