Corporate tax stimulus may not add up to ₹1,45,000 crore

The Finance Minister, Nirmala Sitaraman, seemed to have finally got it right last Friday. While her earlier sops and policy changes for the auto industry, exporters and banks were received with an indifferent ‘this is not enough’ and ‘more is needed’, the mega corporate tax rate cuts elicited roaring applause from India Inc., analysts and the stock market.

The punch line was delivered towards the end, when the FM stated that the total revenue foregone due to the fiscal giveaways was a staggering ₹1,45,000 crore. This made the stimulus look humongous, amounting to 0.7 per cent of the GDP. It made everyone talk about animal spirits being revived once the large savings are ploughed into capacity building or spurring the demand through price cuts.

Of course, the bond market was not pleased by the number and G-sec yields spiked on the announcement. Many were also concerned about the impact on the fiscal deficit that is already under stress due to stuttering direct and indirect tax collections.

But, is the ₹1,45,000 crore number right?

A closer look

There were four major parts to last week’s giveaways. The most significant concession was the reduction in effective income tax on corporates to 25.17 per cent from the highest rate of 34.94 per cent, for companies willing to forego the incentives and exemptions they are availing currently. The revenue impact is likely to be most significant from this move.

The latest Receipts Budget contains effective tax rates of companies filing returns, for FY18 only. We, therefore, used data on tax paid by listed companies in FY19 to see the likely revenue impact.

The Capitalline database contains financial data of 3,700-plus companies listed on Indian bourses that declared their annual results in March 2019. Based on an analysis of these numbers, the impact of the rate reduction appears to be the most on companies earning profit before tax of more than ₹500 crore. The effective tax rate (derived by dividing the tax paid by the standalone businesses by profit before tax) was highest in this category at 26.78 per cent. Due to the withdrawal of certain incentives over the last five years and the additional surcharge and cess imposed in this period, tax outgo has only increased for the larger companies.

Around 111 companies in this group will save about ₹19,000 crore in FY20 by paying lower corporate tax rates, if they opt for the new rates, assuming that the profits remain constant. The reduction will have no impact on around 80 companies, since their effective tax rates were lower than 25.17 per cent in FY19.

The companies earning profit before tax of between ₹100 crore and ₹500 crore also pay higher effective tax rates at ₹26.62 per cent, based on FY19 numbers. These companies can save around ₹11,000 crore through lower rates of 25.17 per cent. In this basket too, of the 348 companies, only 196 will see the tax incidence move lower while for the rest, there will be no impact since their effective tax rate is lower than the new rate.

The tax saving for companies with profit before tax of less than ₹100 crore is relatively lower, since the aggregate effective tax for these companies is below 24.5 per cent. Companies with PBT between ₹1 crore and ₹100 crore can save ₹1,000 crore, if they opt for the new rates. For smaller companies, the tax saving is negligible.

Totally, around 3,700 listed companies could have saved around ₹31,000 crore if they had been taxed at the new rate in FY19. If we pencil-in growth in corporate taxes at 9 per cent (nominal GDP growth rate) in FY20, the savings would be ₹33,800 crore.

However, corporate tax collections have been clocking a lower 5 per cent growth in the first four months of this fiscal. Also, corporates are under greater stress in FY20 due to lower consumption demand and tight liquidity conditions. So the saving this year may not be significantly different compared to FY19.

The tax savings also need to be adjusted for unlisted companies. According to Budget documents, 2,771 companies account for 73.5 per cent of the corporate tax collections. Therefore, the 3,700 listed companies that belong to the organised sector would be accounting for a bulk of the taxes paid. Even if we generously extrapolate the number to account for taxes saved by unlisted companies, total revenue foregone is likely to be be less than double the revenue loss in listed companies.

The other important factor that needs to be kept in mind is that the companies opting for the new rates have to forego the incentives and exemptions they are claiming now. The projected revenue impact of the various incentives such as deductions for units in SEZs, for infrastructure and power companies accelerated depreciation was ₹1,39,486 crore in FY19. This number will reduce, if more companies opt for the lower tax rate of 22 per cent. It is, therefore, quite likely that the Centre mitigates the impact of the revenue lost due to lower tax rates through the reduction in outgo through these incentives.

Other fiscal stimulus

The other fiscal leeway provided by the FM last week was, allowing domestic manufacturing companies set up after October 1, 2019, to pay tax at a lower 15 per cent rate if they forego other incentives. The impact of this measure is not likely to be felt on the revenue collection for the next few years since these companies will take time to commence operations and turn profitable.

The reduction in the rate of Minimum Alternate Tax from 18.5 per cent to 15 per cent will reduce the MAT collections, that amounted to ₹30,700 crore in FY19. But the impact would not be too material.

As far as the roll-back of the enhanced surcharge on capital gains made on equity and equity mutual funds is concerned, it may not matter too much to the revenue this fiscal year. One, the capital gains tax and the surcharge existing prior to July 2019 still remains. Two, it is unlikely that there will be much capital gains made this fiscal, given the state of the equity market so far. Also, the long-term capital gains made until January 31, 2018, were grandfathered when the LTCG tax of 10 per cent on equity and equity mutual fund was introduced in the Union Budget of 2018.

Need some answers

Putting the above together, the incidence of lower corporate tax rate can be up to ₹60,000 crore but the impact can be lower due to saving made in revenue foregone on various incentives. Other stimulus measure announced last week are unlikely to reduce Centre’s revenue materially in the near future.

The Centre, therefore, needs to throw some light on how the ₹1,45,000 crore number was arrived at. It is possible that the FM was talking about the impact over two to three years. Some clarity in this regard will be welcome.