Corporate Tax Concessions and Revenue Forgone in India (2019 Onwards)

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:

1. 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.
2. 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:

1. 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%.
2. 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:

1. 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.
2. 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.

Additional Observations:

1. 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.
2. 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.
3. 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:

1. 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.
2. 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.
3. Comprehensive Impact Assessment:
   • Introduce robust cost-benefit analysis frameworks for tax policy decisions.
   • Enhance transparency in estimating revenue impacts of tax concessions.
4. Post-Pandemic Policy Adjustments:
   • Address new economic realities shaped by the pandemic, including the need for enhanced fiscal capacity.
5. Alternative Revenue Sources:
   • Strengthen GST compliance and widen the tax base to mitigate revenue losses from corporate tax cuts.