Tax experts have often contested the Government's claim that the effective rate of tax on companies is no higher than 20 per cent. They have argued that while the general impact of the statutory rate of corporation tax, including surcharges and the education cess, is estimated at 33.6 per cent of the total profits reported by corporate assessees, only a few companies manage to substantially bring down their total liability through intelligent tax planning. The corporation tax burden on a large number of companies continues to be in the region of 30 per cent and above.
With the presentation of the Union Budget for 2008-09 a few days ago and the corporate sector not having got any relief in the form of a lower tax rate, it is perhaps the right time to assess the validity of these claims and counterclaims.
The good news is that the Government's Budget documents this year have brought out valuable information on tax returns filed by over 328,000 companies up to December 2007. This is as large a sample as one could get for any meaningful analysis. The available data account for over 90 per cent of the total tax returns expected to be filed in the current financial year.
What do they show? The total profits, reported by over 328,000 companies, were estimated at Rs 556,000 crore (one-third of these companies, mind you, reported losses).
The total corporation tax, including surcharge and education cess, paid by these companies was estimated at Rs 114,000 crore, thus taking the effective corporation tax rate to 20.6 per cent. A year ago, the effective tax rate was marginally lower at 19.2 per cent.
That is the government's argument. What does a closer reading of the data show? Just 150 out of these 328,000 companies reported pre-tax profits of over Rs 500 crore (Rs 5 billion) each. These 150 companies accounted for 54.8 per cent of the total pre-tax profits earned by all the companies covered in the sample.
And their share in the total corporation tax paid by all the companies was also as high as 54.1 per cent. Interestingly, the effective rate of taxes at this level comes to 20.6 per cent. In other words, companies that have a lion's share in total profits and total revenues are being taxed at 20 per cent, much lower than the statutory rate of 33.6 per cent.
The effective rate of taxation for companies earning profits between Rs 10 crore (Rs 100 million) and 500 crore {Rs 5 billion) (they are numbering a little over 3,700)} is even
lower at around 19 per cent.
So, have the tax experts got it all wrong? Not really. For, it should be remembered that the effective tax rate for the top profit-making companies is only an average rate. It is entirely possible that even among those 3,850 companies earning profits of over Rs 10 crore, several of them are paying taxes at a rate much higher than the average effective tax rate of 19-20 per cent.
Just as several of these companies may be enjoying various tax exemptions and bringing down their tax liability, there will be an equally large number of other companies which may be paying a higher rate of tax because they cannot take advantage of the incentives.
Not surprisingly, an examination of the profile of sample companies seen across the range of effective tax rates shows that there are over 70,000 companies that pay taxes at the rate of over 33.6 per cent.
These companies account for 16 per cent of the total profits earned by all the companies covered in the sample and they pay about 30 per cent of the total taxes. Another 30,000-odd companies pay at an effective tax rate of 30-33.6 per cent, accounting for 21 per cent of the total taxes paid by these 328,000 companies in the sample.
In other words, there are at least 100,000 companies (almost one-third of the sample size) that are currently being taxed at a rate higher than 30 per cent.
The debate over whether the government is justified in using the effective rate of taxation to defend its current corporation tax rates as reasonable and low should hopefully come to an end after this.
The effective rate of corporation taxes may well be 20 per cent, but about a third of Indian companies fork out taxes at a rate that ranges between 30 and 33.6 per cent. Yet another fact emerges from the valuable data the finance ministry's Budget documents have brought out this year.
There are now only 3,850 companies that the income-tax department at the Centre need to track closely as they are the main contributors to the corporation tax kitty.
They account for over 88 per cent of total profits earned and over 85 per cent of the total taxes paid. Tax administration (including phasing out exemptions) can certainly get better with such data at the command of the taxman.
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