The Narendra Modi government will be presenting its first budget in about a month’s time. It is that time of the year when business lobbies meet the finance minister and present him with their wish-list of what they expect from the budget.
This year, among other things, the lobbies seemed to have asked for a simpler tax regime. “A simple, transparent and non-adversarial tax regime, bereft of complexities and ambiguities, would go a long way to strengthen business sentiment and restore faith of the foreign investor in the India growth story,” Ajay Shriram, president of Confederation of Indian Industries (CII) told the media. It’s hard to argue with that demand. But a closer examination will reveal that the companies represented by such industry bodies benefit the most from a complex tax system, which allows for a slew of exemptions and loopholes. Do do Indian businessmen really mean it when they say they want a simpler tax regime?
Along with the budget every year, the government of India releases the “statement of revenue foregone”. The statement for the financial year 2013-2014 provides some interesting information about the income tax paid by Indian companies during the 2011-12 fiscal.
The statement considered the tax expenditure of 4,94,545 companies for an interesting bit of analysis. While the statutory tax rate was 32.445%, the effective average tax for these companies came in at 22.85%. What explains this difference? The complex tax regime. How? We shall see in a moment.
Interestingly, the greater the profits made by a company, the lower was its effective rate of income tax. As can be seen from the table above, companies which made a profit of between Rs 0-1 crore had an effective tax rate of 26.26%. For companies which made a profit of greater than Rs500 crore, the effective rate fell to 21.67%.
More than half the companies in the sample (around 53.2%) had an effective tax rate of up to 20% of their profits. “In other words, a large number of companies (263,315) contributed a disproportionately lower amount in taxes in relation to their profits,” the statement points out.
So, why is there such a huge difference between the statutory rate of income tax and the effective rate that the companies are paying? The only explanation for this is the huge number of deductions allowed by the Income Tax Act, 1961. Every deduction that has been added to this Act over the years has made it inherently more complicated, and less simple. And companies have been taking advantage of this complexity and ensuring that they do not have to pay tax at the statutory rate.
The revenue foregone, or the money that would have flown to the exchequer if all companies paid statutory tax rates, has been rising. The figure was Rs 81,214.3 crore for 2011-2012 and was expected to be at Rs 89,446.6 crore for 2012-2013.
The effective rate of income tax that companies pay has marginally risen over the years. It went up from 20.55% in 2006-2007 to 24.1% in 2010-2011 and fell to 22.85% in 2011-2012. The rate of increase in the effective rate of income tax paid by companies has been very slow.
When companies complain about the complex tax regime, what they mostly mean is that they want a less aggressive income tax department. The complexity in rules translate directly into more money for companies, and in general, they have not been known, anywhere in the world, to lobby hard so they could make less money.