The Budget presented by Nirmala Sitharaman reveals an interesting phenomenon overlooked by analysts and economists.
For this financial year (FY) 2020-21, the corporate tax revised estimates at Rs 4.46 lakh crore is lower than ‘Taxes on income other than corporation tax’ at Rs 4.47 lakh crore.
Taxes other than corporation tax primarily consist of personal income taxes. Even for the upcoming FY 2021-22, taxes other than corporation tax are projected to be higher.
The corporate tax collections have now reached the levels achieved in FY 2015-16, five years back. Not very long back in FY 2010-11, corporate tax used to be twice of personal income taxes.
So what happened? The main reasons are - (i) tax bonanza announced by the government for corporates and (ii) dwindling profitability situation aggravated by the pandemic.
In 2019 after a grand victory in Lok Sabha elections, the Modi government lowered the corporate tax rate to 22% from 30% for companies that don't seek exemptions. In addition, for new manufacturing firms corporate tax rate was lowered to 15% from 25%.
A press note released by the government stated that the revenue estimated to be foregone after the corporate tax cut would be Rs 1.45 crore.
Consequently corporate tax collections fell from Rs 6.21 lakh crore in FY 2018-19 to Rs 5.56 lakh crore in FY 2019-20 and now Rs 4.46 lakh crore in FY 2020-21.
Then came the pandemic in March 2020 resulting in a complete lockdown of close to 2 months crippling economic activity and in turn bleeding companies across many sectors.
While many large corporations have recovered from the crisis and even posted higher profits on account of low costs - salaries, office expenses due to work from home, etc; the small and medium scale enterprises have been badly hit.
The situation was already worsening before the pandemic struck. So everything should not be blamed on COVID-19.
India Inc’s profit contribution to the country’s gross domestic product (GDP) fell to 1.8 per cent in FY 2019-20 — the lowest reading since at least 1999-2000. India’s corporate profit-to-GDP ratio is among the lowest in the world.
At its peak in FY08, the contribution stood at 7.8 per cent. Since then, it has witnessed a declining trend. Corporate earnings growth has largely remained stagnant / muted in the last five years.
While it is widely acknowledged that a few individuals pay bulk of the personal income taxes, the situation is more lopsided in the corporate sector.
Top 2.5% of companies account for 82% of total corporation tax, the corresponding number for individuals is 61%. While it does point out unequal distribution of income among individuals it also points to the poor state of financial health of our corporates.
Around 35% of the companies which file returns report losses (negative income). Another 15% report zero taxable income. This doesn’t speak well of the financial health of our corporates.
Companies making losses are a burden on the economy. While some may genuinely be making losses, others allegedly inflate expenses to reduce income and hence tax burden.
Further, all corporates in India are not filing returns. Only around 70% of them appear as effective assessees in data released.
In the first budget of 1947-48, India’s corporate taxes were lower than personal taxes. Due to rapid industrialization this phenomenon turned upside down with corporate taxes higher than personal taxes. Now more than 70 years after Independence we are back to square one.
In a country where only 7% of the population pays income tax or where only one-third of households pay income tax, this situation is not tenable in the long run. India’s corporate world has to buckle up.