By TV Mohandas Pai & S Krishnan
it is five years since the NDA began its first innings, and it's time to evaluate India's competitiveness on the direct tax front. Arun Jaitley, in his 2015 Budget speech, announced, "We are considered as having a high Corporate Tax (CT) regime but we do not get that tax due to excessive exemptions. I propose to reduce the rate of Corporate Tax from 30% to 25% over the next four years. This process of reduction has to be necessarily accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes."
He started the process of tax reduction in FY17, with a small reduction of 1% for companies whose turnover was less than `5 crore, and announcing a CT of 25% for new manufacturing companies who do not avail of any exemption. In his last 2018 Budget proposal, he extended the 25% rate reduction to MSME's with annual turnover up to `250 crore.
There was high expectation that the new FM, Nirmala Sitharaman, in her maiden budget, would fulfil the earlier promise of reducing CT to 25% for all companies by 2019. She said, in her maiden budget speech, "So far as CT is concerned, we continue with phased reduction in rates. Currently, the lower rate of 25% is only applicable to companies having annual turnover up to `250 crore. I propose to widen this to include all companies having annual turnover up to `400 crore. This will cover 99.3% of the companies. Now only 0.7% of companies will remain outside this rate". The FM forgot to mention that 0.7% of the companies in India contribute about 79% of the total CT.
The Receipt Budget 2019-20 reveals that a small number of companies, 373, with profits before taxes (PBT) of `500 crore and above, contributed 52% of CT in FY18 and 16.35% of CT was contributed by 1,236 companies with PBT of `100-500 crore. Two years after the CT reduction began, about 68.5% of the total CT was contributed by a miniscule 0.2% of all companies! What was promised by the FM in his 2015 budget speech remains unfulfilled.
The Effective Tax Rate (ETR) and the average statutory CT in FY18 is the highest in the past five years for all companies. The ETR is 29.49% for FY18, compared to 23.22% in FY14-an increase of 27%. This ETR increase has contributed `1.11 lakh crore out of `5.24 lakh core collected as CT. The Receipt Budget 2019-20 states that the impact of 2017 Budget proposal of 25% CT for companies having turnover up to `50 crore is minimal. The NDA government has thus phased out profit linked deductions without proportionately reducing the CT. Obviously, FM Jaitley has not kept his promise.
When the FM announced a rate reduction to 25% over four years, it was expected that this rate reduction would benefit all the companies. By providing CT reduction to MSME's, others have not benefited. Instead, they have been forced to pay more tax due to withdrawal of tax incentives and imposition of 2% additional surcharge from FY16. The ETR for large companies has consequently increased from 20.68% in FY14 to 26.3% in FY18, a 27% increase.
Large companies in the services sector are the biggest employers in India. They provide stable jobs at good remuneration. However, the services sector, which is more job oriented, has a 2.7% higher ETR at 30.55% in FY18 compared to 27.83% in the manufacturing sector, which adopts capital intensive automation and enjoys tax incentives. India incentivises automation and taxes job creation more!
A reduction in the CT of all companies to 25%, and not just for MSMEs, will enable large companies to compete globally, increase their growth leading to higher employment, better quality jobs, and reduce the high cost of capital in India. This will support India becoming a $5 trillion economy.
The accompanying graphic provides the revenue impact of top six incentives for CT payers during FY18 and FY19. Budget 2016 reduced the maximum depreciation rate to 40%, with effect from FY18, and removed other deductions. A reduction in the maximum depreciation rates to 25%, and the general rate to 10% would enable the government to reduce the CT for large companies by about 2%. A reduction in the CT will reduce the cost of credit from the banking system over time and make the job-intensive services sector more competitive. A 2% CT reduction will enable banks to write back deferred taxes up to `10,000 crore and corporates will be able to write back about `25,000 crore. By lowering the CT, the labour intensive industries will have more cash to grow faster and create more jobs, which is India's top priority.
Jaitley had also announced, in Budget 2015, his "vision of putting in place a direct tax regime which is internationally competitive on rates, is without exemptions, incentivises savings, and does not realise tax from intermediaries."
A study on the CT around the world in CY 2018 reveals that the worldwide average statutory CT to be 23.03%, measured across 208 tax jurisdictions. The average statutory CT is 21.86% among EU countries, 23.93% in OECD countries and 27.63% in the G7. The US has a combined statutory rate of 25.84%. The majority of the 208 separate jurisdictions surveyed have CT below 25% and 103 have rates between 20% and 30%. This study was conducted by Tax Foundation, a tax policy non-profit organisation based in the US.
India's average statutory CT at 34.4% in FY18 is higher by more than 10% compared to the worldwide average statutory CT. Instead of India being internationally competitive in tax rates, it has the highest CT among the large economies in CY18. It is in the ninth spot among the 20 countries with the highest CT in the world. This high CT in India is negatively impacting the competitiveness of Indian multinational companies, and India as a destination for investment. When overseas investors come to India with a much lower cost of capital, Indian entrepreneurs cannot compete with a much higher cost.
At the end of five years of NDA government, the CT reduction is not provided to all companies but only to MSMEs. Tax collection has increased hugely by reduction of depreciation rates and withdrawal of corporation taxbreaks. India has the highest CT among large economies, making its direct tax regime most uncompetitive internationally. The quantum of tax litigation in India has gone up considerably at all levels too. While Our FMs have been lofty in making statements, they have not kept their promise.
It is very important for the present FM to first reduce the CT to 25% for all companies, incentivise labour-oriented service industries in India and keep the promise made to its citizens which will enable India to move to a $5 trillion economy.
(Pai is Chairman, Aarin Capital & Krishnan is Tax consultant. Views are personal.)