This article is based on The Hindu newspaper coverage Tax cuts may have saved ₹3 lakh crore for India’s corporates – In the five years since FY20, company profits grew at 32.5% while corporate taxes paid grew at only 18.6%
Overview of Tax Concessions:
- Introduction of Concessional Tax Regime (2019):
- Corporate tax rates for domestic companies were reduced from 25%-30% to 22% under the new tax regime.
- Special rates for new manufacturing companies: reduced to 15% for those meeting specified conditions.
- Companies opting for the new regime forgo certain deductions under the Income Tax (IT) Act.
- Impact of Concessional Taxation:
- Estimated tax savings of ₹3.14 lakh crore for large corporations (BSE 500) since FY20.
- Effective tax rates for top companies fell from ~30% pre-FY19 to 21.2% by FY24.
- Significant decline in corporate tax-to-GDP ratio, raising concerns over fiscal space for development expenditure.
Corporate Tax Collections and Economic Activity:
- Growth Comparisons (Pre- and Post-2019):
- Pre-2019:
- Compound Annual Growth Rate (CAGR) of corporate taxes: 11.5%.
- Profit growth: 10.4%.
- Post-2019 (FY20-FY24):
- Profit growth surged to 32.5%.
- Corporate tax growth lagged at 18.6%.
- Pre-2019:
- Revenue Forgone through Deductions (2012-2022):
- Over ₹8.22 lakh crore lost in revenue due to tax deductions under various IT Act sections.
- Deductions include:
- Charitable contributions.
- Political donations.
- Scientific research expenses.
- Profits from undertakings in northeast India.
Policy Implications:
- Rationale for Rate Cuts:
- Intentions:
- Encourage private investment and job creation.
- Establish a globally competitive environment for domestic businesses.
- Results:
- Mixed evidence of increased private sector investment.
- Improved corporate profitability but limited trickle-down benefits for capital investments.
- Intentions:
- Challenges Highlighted by Experts:
- Class Interests:
- Some argue benefits cater primarily to the business elite (e.g., increased luxury consumption).
- No substantial evidence of the “Laffer curve” theory working in India.
- Cost-Benefit Analysis:
- Lack of comprehensive evaluation of the economic returns on tax concessions.
- Pandemic Effects:
- Pandemic onset muddied evidence of the policy’s direct effects on investment behavior.
- Class Interests:
Additional Observations:
- Sector-Specific Tax Incentives:
- Revenue forgone aligns with policy priorities in research, regional development (northeast), and political/economic stabilization.
- Incentives meant to stimulate investments in underdeveloped regions and industries.
- Corporate Profitability and Investments:
- Higher profitability post-2019 allowed companies to accumulate reserves and current assets.
- Anticipated demand may influence capital investments, though the pace remains inconsistent.
- Government’s Fiscal Position:
- Falling corporate tax revenue relative to GDP limits developmental expenditures.
- Balancing tax incentives with fiscal sustainability remains a key policy challenge.
Policy Recommendations:
- Simplified and Equitable Taxation:
- Balance lower rates with adequate checks to prevent excessive revenue loss.
- Rationalize tax incentives to ensure benefits align with national economic priorities.
- Sectoral and Regional Focus:
- Targeted incentives for sectors with high employment potential (e.g., MSMEs, startups).
- Increase focus on regional inequalities to spur equitable economic growth.
- Comprehensive Impact Assessment:
- Introduce robust cost-benefit analysis frameworks for tax policy decisions.
- Enhance transparency in estimating revenue impacts of tax concessions.
- Post-Pandemic Policy Adjustments:
- Address new economic realities shaped by the pandemic, including the need for enhanced fiscal capacity.
- Alternative Revenue Sources:
- Strengthen GST compliance and widen the tax base to mitigate revenue losses from corporate tax cuts.