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Thursday July 2, 3:22 PM
Corporate tax: Are we paying enough?
As the budget is drawing near, the Confederation of Indian Industry (CII) urged the Government recently to not only reduce corporate tax rate from the existing 35% to 30%, but also remove the surcharge of 2.5%. They also urged the government to bring farm income under the tax net. The CII is also asking for doing away with Minimum Alternate Tax (MAT) so that corporates can pay equitable tax.
Since we Indians, always look to the west for inspiration, we tried to fish out how India Inc. compares with the US Corporations in terms of taxes paid. Do Indian corporations pay abysmally high rates of taxes as compared to the developed countries?
The peak corporate tax in the US is 35% plus 5% state tax, Japan stands at 42%, Germany at 39.6% and UK at 30%. Among Asian counterparts, Korea has corporate tax rate of around 30%. Looking at the above figures, it becomes clear that India Inc. tax rates compare well with most of the developed counterparts. The trend among global economies (including India) over the last 15 years has been a consistent decline in the tax rates. So, there may be a case for bringing the corporate tax marginally down, but more or less India Inc. is in line with global peers.
But before we jump to any conclusions let’s find out, how much did the top corporates actually pay as taxes (excluding deferred taxes) during FY04. Out of the BSE 30 companies, only 3 corporates - ONGC, Tata Power and BPCL paid over 34% as effective tax rate. Overall, only 8 corporates paid taxes over 30%. 14 companies effective tax rate was lesser than 20%. In effect, nearly half of the BSE 30 constituents paid below 20% tax. The balance 8 companies paid between 20% to 30% as effective tax rate.
Of the Dow 30, 6 companies paid tax above 35% in 2003, 13 companies’ effective tax rate was between 20% to 30% and the rest 11 paid below 20% tax.
The reason why half of the top India Inc. companies pay lesser than 20% as tax is because they are either in the infrastructure sector or have set up plants in backward areas with tax exemptions. That is perhaps why the CII is asking for doing away with MAT, as it will increase the tax contribution from India Inc.
But the anomaly becomes clear if we segregate these 30 companies, based on the segment they operate in, i.e. services, manufacturing and agriculture & allied. As per RBI’s FY03 revised estimates, services accounted for a lion’s share (56%) of the GDP, agriculture contributed 22% to GDP and the balance 22% came from manufacturing.
Of the BSE 30, 16 companies are from the manufacturing sector, 12 from the services and 2 (HLL and ITC) from the agri-allied sector. Of the total profit before tax of Rs 561 bn earned by them in FY04, a huge 63% was contributed by the manufacturing companies, which form only 22% of GDP. Meanwhile, the 12 companies that represent the services sector (56% of GDP) on the Sensex, contributed only 28% to the total profit before tax.
Sensex stats
| (Rs m) |
Profit before tax |
Tax |
Effective tax rate |
Contribution to PBT |
Contribution to tax |
| 12 services |
159,278 |
33,965 |
21.3% |
28.4% |
24.3% |
| 16 Mfg |
355,844 |
94,051 |
26.4% |
63.5% |
67.4% |
| 2 Agri |
45,640 |
11,536 |
25.3% |
8.1% |
8.3% |
| Total |
560,763 |
139,552 |
24.9% |
100.0% |
100.0% |
(*excluding deferred tax)
Of the total tax collected (Rs 140 bn), 67% once again came from manufacturing companies. The services sector paid only 24% of the total tax bill of BSE Sensex. There in lies the anomaly.
If we compare these stats with the Dow, the difference becomes even clearer. The Dow 30 companies are distributed equally between services and manufacturing i.e., 15 companies each from both sectors. Their contribution to the profit before tax and tax paid is also equitable, as seen in the table below.
Dow facts
| (US) |
Profit before tax |
Tax |
Effective tax rate |
Contribution to PBT |
Contribution to tax |
| 15 mfg |
114,154 |
29,136 |
25.5% |
47.2% |
48.4% |
| 15 services |
127,544 |
31,005 |
24.3% |
52.8% |
51.6% |
| Total |
241,698 |
60,141 |
24.9% |
100.0% |
100.0% |
Now it must be clear, why the finance ministry is looking at increasing tax quantum from the services sector. The aforesaid figures indicate that the services sector should gear itself for a higher tax liability going forward.
One thing is clear that the Indian tax structure has to be further simplified, which will not only widen the FM’s tax net, but also result in better compliance. One must remember that India’s overall Tax to GDP ratio is amongst the lowest in the world. More sections of the country have to start contributing to the tax net. The sooner this process is started, the better for India’s development.
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