Corp tax collections as proportion to GDP yet to reach pre-tax cut levels

After rationalisation of corporation tax to attract companies to invest in India, the receipts from this head as per cent of the ecocnomy’s size is crawling up but have not reached the levels of pre-2019-20 when this tax was overhauled.

In fact, it is projected to fall short of 2018-19 and 2017-18 levels even in 2024-25 even as the reduced 15 per cent tax for those setting up new production units was withdrawn.  

However, the corporation tax to GDP ratio has crossed 3 per cent since 2021-22 after falling to sub-3 per cent in the first two years of the rate overhaul.

Similarly, corporation tax buoyancy (except for 2021-22) has not reached the level of pre-corporation tax rate cuts. Even in 2024-25, corporation tax buoyancy is projected at 1.38, lower than 1.52 in 2018-19 and 1.61 in 2017-18. However, it should be noted that except for 2019-20 when buoyancy was in negative and 20120-21 when it could not be calculated, buoyancy in all the remaining years was more than one. This meant that the corporation tax rate grew at a higher pace than the gross domestic product (GDP) at current prices, save the two years cited above.  

In 2019, finance minister Nirmala Sitharaman gave an option to domestic company to avail lower tax rate of 22 per cent against the existing 30 per cent provided they forgo exemptions. Companies opting for this option would also not draw minimum alternate tax (MAT). After cess and surcharges, the new tax stands at 25.17 per cent as compared to existing 34.94 per cent.

Similarly, to push the ‘Make in India’ programme, the finance minister also gave an option to companies, set up after October one, 2019 and  making fresh investment to draw 15 per cent corporation tax against the existing 25 per cent. These companies must start manufacturing by March 31, 2023. This date was later extended to March 31, 2024. The interim Budget for 2024-25 did not extend that date.

After surcharges and cesses, this tax comes to 17.01 per cent against 29.12 per cent if the companies don't opt for this tax. These companies will also have to forgo exemptions and there will be no MAT on them.

As many as 20.47 per cent of companies filing returns have opted for concessional corporation tax rate of 22 per cent in 2020-21 against 15.85 per cent in the previous year. However, these companies had 61.35 per cent of total income declared under corporation tax.

However, only 0.36 per cent of companies opted for a lower 15 per cent tax, according to latest budget papers.

The government lost a little over Rs 1 trillion in 2020-21 on account of a cut in corporate taxes, Minister of State for Finance Pankaj Chaudhary had said earlier. In a written reply in the Rajya Sabha in August last year, Chaudhary had pegged the estimated revenue loss at Rs 100,241 crore.

The loss was less than Rs 1.28 trillion suffered by the government in in 2019-20, according to the figures revealed by the minister earlier.

Direct tax collection, net of refunds, moderately exceeded the revised estimates (RE) for the financial year 2023-24 on the back of personal income tax revenues, but corporation tax receipts fell short of the RE.

Direct tax collection stood at Rs 19.58 trillion in FY24, surpassing the RE of Rs 19.45 trillion by Rs 13,000 crore, or 0.7 per cent.

The government had revised up FY24 projections for personal income tax by 13.5 per cent over the Budget estimates (BE) of Rs 9 trillion, at Rs 10.22 trillion. The actual collection (including securities transaction tax), however, exceeded the RE by 2.1 per cent at Rs 10.44 trillion.

On the other hand, the RE for corporation tax was kept at the same level as the BE, at Rs 9.23 trillion for the year. Even then, the mopup fell short of the estimates by Rs 12,000 crore, or 1.3 per cent, at Rs 9.11 trillion.

As such, while actual growth in personal income tax collection was higher at 25.3 per cent in FY24, as against 22.7 per cent pegged in the RE over the FY23 mopup, that of corporation tax was lower at 10.3 per cent, as against 11.7 per cent in the RE.