Taxed at a significantly lower rate following the introduction of the concessional tax regime in 2019, India’s largest corporates may have saved over ₹3 lakh crore in tax payments since then. This is in addition to over ₹8 lakh crore in revenue foregone through various deductions granted to companies in the decade since 2012-13 (FY13).

Experts note that while the tax cuts point towards the need to rationalise tax incentives, a decline in corporate tax-gross domestic product (GDP) ratio could limit the government’s ability to finance additional development expenditure.

Until 2019, a corporate tax rate of 25% was levied on domestic companies with an annual turnover of up to ₹400 crore. It was 30% for the rest. The new tax regime slashed the rate to 22% as long as the companies forgo certain deductions under the Income Tax (IT) Act. In addition to this, tax rates for new manufacturing companies were lower, provided they fulfilled certain conditions.

Suranjali Tandon, Associate Professor at NIPFP, explains that the new tax regime is indicative of a preference for a “simpler tax system with lower rates” as corporate tax rates have undergone changes at different points before to align with the country’s economic priorities.

“However, there is no consensus on the optimal corporate tax rates as this may vary as per economic circumstances and context,” she says.

R. Nagaraj, Distinguished Senior Fellow at IIT Bombay, argues that a reduction in corporate tax rates mainly serves the “class interests” of the “business community” — evident in the simultaneous increase in luxury consumption. “This is the standard Laffer curve argument which was popular during the Reagan administration in America. But we do not have any evidence of this working anywhere in the world, especially not in India.” To get a sense of the amount saved in taxes as a result of this incentive, data of India’s largest companies, those on the BSE 500 index, were considered, which were sourced from the Capitaline database.

So, until FY19, The Hindu’s analysis shows, the effective tax rate for these companies, which is the average rate at which the profits (before taxes) of corporations are taxed, was 30% or higher. The ratio declined in the subsequent years, and touched a low of 21.2% in FY24. Moreover, the top 10% of the BSE 500 companies continued to enjoy lower effective tax rates compared to the overall average for all companies, even as the gap has considerably narrowed in recent years.

Table 1 shows the effective tax rate (in %)

Charts appear incomplete? Click to remove AMP mode.

“As large companies opt for the new regime, the lower effective tax rate is expected,” says Prof. Tandon.

In absolute terms, this could have translated into a tax saving of roughly ₹3.14 lakh crore for these companies since FY20.

The figures were estimated by calculating the compound annual growth rate (CAGR) in taxes paid by companies in the five years ending at FY19 (which was 11.5%) and also assuming a similar rate of growth for the subsequent years until FY24 had the tax cuts not been introduced, provided all other factors remained constant (Table 2).

Table 2 shows the tax data for BSE500 companies for which figures were available^

Company profits grew at a much slower pace at 10.4% in the five years ending at FY19. In the five years since FY20, however, company profits have grown at a rate of 32.5% while corporate taxes paid by these companies have done so only by 18.6%.

Apart from tax rates and profits, the level of economic activity also influences corporate tax collections, says Zico Dasgupta, Assistant Professor of Economics at Azim Premji University.

While the intent behind such changes was to encourage private investment, create jobs and “establish a globally competitive business environment for certain domestic companies”, Prof. Dasgupta says there is little evidence to suggest that tax incentives make businesses more competitive.

But since tax concession also means forgone expenditures by the government, it seems to me that the more important policy question pertains to a cost-benefit analysis of providing greater tax concession.”

He says, “The corporate tax concessions announced in the pre-COVID-19 period do not seem to be based on such considerations.”

Prof. Tandon notes that since the incentives coincided with the pandemic, the evidence to suggest increased private sector investments due to rate cuts is “mixed”. “Nevertheless, the profitability of companies has allowed them to create reserves and to invest in current assets. In part, the anticipated demand can influence the decision to make capital investments.”

Companies also avail tax concessions in the form of deductions under various sections of the IT Act. For instance, tax incentives are granted on donations made to charitable trusts, contributions to political parties, expenditure on scientific research or on profits of undertakings set-up in north-eastern States among others. The government calculates the revenue impact of such concessions in the Budget document each year and this is done for a larger database of over 10 lakh companies.

Revenue forgone due to such deductions amounts to ₹8.22 lakh crore in the decade ended FY22 (latest data). The data show an underestimation of the revenue impact in six of the ten years considered (Table 3).

Table 3 shows the revenue impact of major tax incentives for corporate tax payers (in Rs. crore). It also shows the projected revenue impact (in Rs. crore). The data show an underestimation of the revenue impact in six of the ten years considered.

With inputs from Sindhu Hariharan

Source: Budget documents, Capitaline

samreen.wani@thehindu.co.in

Farmers expect this government to take a radical break from all its earlier Budgets. File
| Photo Credit: MUSTAFAH KK

The Bharatiya Janata Party-led National Democratic Alliance faced huge setbacks in the Lok Sabha elections in the agrarian belts of the country. The BJP lost in at least 38 seats in five States where the farmers’ movement against the policies of the Narendra Modi government was strong. This government is a continuation of the first two Narendra Modi regimes that favoured the corporate houses and tweaked policies in the agriculture sector in their favour.

Farmers expect that this government make a radical break from all its earlier Budgets. Of course, this is asking for a tall order. But unless that is done, the farmers’ unrest and agrarian crisis are not going to subside. The National Crime Records Bureau’s data tells us that 1,00,474 farmers and agricultural workers committed suicide between 2015 and 2022. This figure is growing and is a tragic indication of India’s agrarian crisis.

The most important issue for farmers in the country today is statutory minimum support price at the rate of C2+50%, that is one and a half times of the comprehensive cost of production, as recommended by the M.S. Swaminathan Commission. This was a promise made by Narendra Modi and the BJP manifesto in 2014. Now, they are silent on this. Unless that’s done, it’s going to be impossible even to begin to resolve the agrarian crisis. They will have to make Budgetary provisions to implement this. This is our first demand. But to do this, they will have to hold discussions with farmers’ movements. There have been no such discussions.

The second point is about the rising cost of production. Our expectation from this year’s Budget is that the government bring down production costs by reducing prices of fertilizers, seeds, insecticides, diesel, water and electricity. Rates of all these inputs are going up. Even if farmers are to be given MSP at C2+50%, the cost of production must be brought down. A statutory MSP at a rate of C2+50% may have no meaning if the costs of production are not brought down.

The government can bring down these prices by having a strict control through the Budget on the corporates who are now part of the production process of these inputs. Earlier, most of these inputs were produced by the public sector. The Budget must support public sector companies to continue to be engaged in the production of fertilizers, insecticides and seeds. This government talks of self-reliance, but does nothing to improve self-reliance. This is apparent in the case of fertilizers.

The third expectation from this Budget is a complete one-time loan waiver for farmers and agricultural workers nationwide. Unless this is done, farm suicides cannot be prevented. This government has written off loans worth ₹16 lakh crore of corporates. And, they say they don’t have money to waive loans of farmers. Loan waiver, bringing down the cost of production and ensuring MSP at a rate of C2+50 must be done together. If this is done, 70% of the crisis in the farm sector can be dealt with.

The fourth point is relevant in the context of climate change. In light of regular droughts, floods, unseasonal rains and hailstorms, there must be a comprehensive crop insurance scheme, which is totally different from the Pradhan Mantri Fasal Bima Yojana. Several States have opted out of it. Some States have begun their own scheme. This is because PMFBY is working in the interest of insurance companies, and not farmers. Budgetary provision must be made for a comprehensive scheme that helps farmers.

The fifth point is on the question of irrigation and power. Public sector investment in irrigation and power has been cut in the last decade. These sectors are being handed over to private companies and hence, the cost of water and power is rising. The private sector cannot invest the monies a government can, for example, in building dams. The question of irrigation must be addressed by the Union government. A number of irrigation projects are incomplete nationwide. If they are completed, a large section of land will come under irrigation. So, the Budget must make provisions to complete these irrigation projects.

In the power sector too, unless there is public investment, it will be difficult to ensure steady supply of electricity. Power production is also now under the control of corporate houses. Smart meters are going to create havoc for all consumers, both rural and urban. The government had agreed to hold a discussion on Electricity Act amendments. But no discussions have been held so far.

The sixth point is about the expansion of MGNREGA. Ever since the Modi Government came to power, they have been trying to starve MGNREGA of funds. The number of work days has come down to just 42. The government must increase wages to ₹600 and the number of work days to at least 200. It is a lifeline for rural workers and it will be a step to increase their purchasing power.

The seventh point, which is very important, is the question of land. The government has changed the slogan of ‘Land to the Tiller’ to ‘Land to the Corporates’. In total violation of the Land Acquisition Act, there is massive acquisition of farm lands by corporate houses. Tribal lands are being taken by the government without any compensation for mining and other purposes. Land acquisition must be done only when strictly necessary for public purposes. Radical land reforms must be initiated and completed.

To raise resources for all this, the Union government must impose wealth tax and inheritance tax. They have tremendously reduced corporate tax. They must restore it. India is a country with one of the least rates of corporate taxes. Income tax slabs also must be changed to ensure the rich pay more. They are reducing income tax across the board, instead of providing relief to the middle class. Direct taxes must be increased and indirect taxes must be reduced and tax evasion must be stopped using stringent methods.

(Dr. Ashok Dhawale is a senior leader of the Samyukt Kisan Morcha and President of the All India Kisan Sabha.)

Farmers expect this government to take a radical break from all its earlier Budgets. File
| Photo Credit: K.K. Mustafah

The Bharatiya Janata Party-led National Democratic Alliance faced huge setbacks in the Lok Sabha elections in the agrarian belts of the country. The BJP lost in at least 38 seats in five States where the farmers’ movement against the policies of the Narendra Modi government was strong. This government is a continuation of the first two Narendra Modi regimes that favoured the corporate houses and tweaked policies in the agriculture sector in their favour.

Farmers expect that this government make a radical break from all its earlier Budgets. Of course, this is asking for a tall order. But unless that is done, the farmers’ unrest and agrarian crisis are not going to subside. The National Crime Records Bureau’s data tells us that 1,00,474 farmers and agricultural workers committed suicide between 2015 and 2022. This figure is growing and is a tragic indication of India’s agrarian crisis.

The most important issue for farmers in the country today is statutory minimum support price at the rate of C2+50%, that is one and a half times of the comprehensive cost of production, as recommended by the M.S. Swaminathan Commission. This was a promise made by Narendra Modi and the BJP manifesto in 2014. Now, they are silent on this. Unless that’s done, it’s going to be impossible even to begin to resolve the agrarian crisis. They will have to make Budgetary provisions to implement this. This is our first demand. But to do this, they will have to hold discussions with farmers’ movements. There have been no such discussions.

The second point is about the rising cost of production. Our expectation from this year’s Budget is that the government bring down production costs by reducing prices of fertilizers, seeds, insecticides, diesel, water and electricity. Rates of all these inputs are going up. Even if farmers are to be given MSP at C2+50%, the cost of production must be brought down. A statutory MSP at a rate of C2+50% may have no meaning if the costs of production are not brought down.

The government can bring down these prices by having a strict control through the Budget on the corporates who are now part of the production process of these inputs. Earlier, most of these inputs were produced by the public sector. The Budget must support public sector companies to continue to be engaged in the production of fertilizers, insecticides and seeds. This government talks of self-reliance, but does nothing to improve self-reliance. This is apparent in the case of fertilizers.

The third expectation from this Budget is a complete one-time loan waiver for farmers and agricultural workers nationwide. Unless this is done, farm suicides cannot be prevented. This government has written off loans worth ₹16 lakh crore of corporates. And, they say they don’t have money to waive loans of farmers. Loan waiver, bringing down the cost of production and ensuring MSP at a rate of C2+50 must be done together. If this is done, 70% of the crisis in the farm sector can be dealt with.

The fourth point is relevant in the context of climate change. In light of regular droughts, floods, unseasonal rains and hailstorms, there must be a comprehensive crop insurance scheme, which is totally different from the Pradhan Mantri Fasal Bima Yojana. Several States have opted out of it. Some States have begun their own scheme. This is because PMFBY is working in the interest of insurance companies, and not farmers. Budgetary provision must be made for a comprehensive scheme that helps farmers.

The fifth point is on the question of irrigation and power. Public sector investment in irrigation and power has been cut in the last decade. These sectors are being handed over to private companies and hence, the cost of water and power is rising. The private sector cannot invest the monies a government can, for example, in building dams. The question of irrigation must be addressed by the Union government. A number of irrigation projects are incomplete nationwide. If they are completed, a large section of land will come under irrigation. So, the Budget must make provisions to complete these irrigation projects.

In the power sector too, unless there is public investment, it will be difficult to ensure steady supply of electricity. Power production is also now under the control of corporate houses. Smart meters are going to create havoc for all consumers, both rural and urban. The government had agreed to hold a discussion on Electricity Act amendments. But no discussions have been held so far.

The sixth point is about the expansion of MGNREGA. Ever since the Modi Government came to power, they have been trying to starve MGNREGA of funds. The number of work days has come down to just 42. The government must increase wages to ₹600 and the number of work days to at least 200. It is a lifeline for rural workers and it will be a step to increase their purchasing power.

The seventh point, which is very important, is the question of land. The government has changed the slogan of ‘Land to the Tiller’ to ‘Land to the Corporates’. In total violation of the Land Acquisition Act, there is massive acquisition of farm lands by corporate houses. Tribal lands are being taken by the government without any compensation for mining and other purposes. Land acquisition must be done only when strictly necessary for public purposes. Radical land reforms must be initiated and completed.

To raise resources for all this, the Union government must impose wealth tax and inheritance tax. They have tremendously reduced corporate tax. They must restore it. India is a country with one of the least rates of corporate taxes. Income tax slabs also must be changed to ensure the rich pay more. They are reducing income tax across the board, instead of providing relief to the middle class. Direct taxes must be increased and indirect taxes must be reduced and tax evasion must be stopped using stringent methods.

(Dr. Ashok Dhawale is a senior leader of the Samyukt Kisan Morcha and President of the All India Kisan Sabha.)

Share of personal income tax and indirect tax shows increase

Over the last week, during the election campaign, the Congress’ manifesto and the party’s emphasis on social justice and welfare were suddenly thrust into the limelight. Prime Minister Narendra Modi sought to give the Congress’ demand for a caste census and its plans to study distribution of surplus government land to the poor, among others, a communal turn. The Congress defended its manifesto saying the rising wealth inequality in the country needs to be addressed and dismissed Mr. Modi’s claims that its plans intended to favour a particular religious group. In the midst of this political controversy, the chairman of the Indian Overseas Congress, Sam Pitroda, floated the idea of an inheritance tax, which is not in place in India and is also not mentioned in the Congress’ manifesto.

Almost concurrently, as this political debate was playing out, the Finance Ministry released provisional data that showed an uptick in net tax collections. This is mostly driven by an increase in personal income tax and securities transaction tax collections. On the other hand, collections from net corporate taxes have reduced marginally. The data also show that revenues from personal income tax and securities transaction tax grew at almost double the pace compared to revenues from corporate taxes last year.

We look at some numbers to provide context to the ongoing debate and the recent release of tax data.

Chart 1 | the chart shows corporate tax and personal income tax as a share of gross tax revenue, as of February every year.

Chart appears incomplete? Click to remove AMP mode

As can be seen from the chart, the share of corporate tax has been on a decreasing trend, while that of personal income tax has been increasing. As of February 2024, the gap between the two tax shares further increased, with income tax forming 28% of the gross tax — a new peak. The sharp fall in corporate tax after FY19 can be attributed to the deep corporate tax cuts introduced by the Bharatiya Janata Party-led government in September 2019.

The data also show that the share of direct taxes has been decreasing, while that of indirect taxes has been increasing. Direct taxes, which include taxes levied directly on the incomes of corporations and individuals, are said to be “progressive” because those who earn less are taxed less and vice-versa. On the other hand, indirect taxes, which include union excise duties and the Goods and Services Tax are considered “regressive” as all consumers, regardless of their income levels, pay the same amount.

Chart 2 | The chart shows the share of direct and indirect taxes in the combined tax revenue receipts of the Centre and the States across years.

As can be seen from the chart, the share of indirect taxes, which had been falling steadily since the 1980s, has increased in the past decade. On the other hand, the share of direct taxes, which had been increasing, has consistently recorded a downturn in recent years.

Chart 3 | The chart shows the annual income bracket-wise share in total income tax returns filed (blue) and the share in total amount of income tax paid (red). Figures in %

Importantly, Chart 3 shows that a bulk of those who file personal income tax earn an annual income of ₹1 lakh-₹5 lakh. Richer individuals who earn more than ₹50 lakh are few and far between.

Moreover, a comparison with BRICS economies, for which data are available, shows that the effective personal income tax rate in India is among the highest (Chart 4).

Chart 4 | The chart compares the effective personal income tax rate in India with other BRICS countries which had data. 

Note: In case a country had two tax regimes, the highest effective tax rate was considered for comparison

Put together, the data show that poorer citizens and those in the middle-class category are increasingly shouldering a higher share of the tax burden. This is due to the combination of the rising share of personal income tax and indirect taxes in total revenue.

Rachita Rabboni is interning with The Hindu Data Team

Source: Centre for Monitoring Indian Economy, Controller General of Accounts, PricewaterhouseCoopers (PWC)

Watch our Data video: Watch | Key questions remain unanswered in electoral bonds controversy

Japan’s Prime Minister Fumio Kishida delivers his policy speech during an extraordinary session of the Diet at the parliament in Tokyo on October 23, 2023. Photo: Kyodo News via AP

Japan’s Prime Minister Fumio Kishida said on October 23 he is preparing to take bold economic measures, including an income tax cut for households hit by inflation and tax breaks for companies to promote investment, in what’s seen as a move to lift his dwindling public support.

In his speech to start a new Parliamentary session, Mr. Kishida said it was time to shift from an economy of low cost, low wages and cost-cutting to one backed by growth led by sustainable wage hikes and active investment.

“I’m determined to take unprecedentedly bold measures,” Mr. Kishida said, pledging an intensive effort to achieve stronger supply capability in about three years.

“I will put more emphasis on the economy than on anything else.” He said he is determined to help people ride out the impact of soaring prices for food, utilities and other costs that have exceeded their salary increases, by implementing income tax cuts. He also pledged to introduce corporate tax incentives to promote wage increases, investment and optimisation.

Previously, Mr. Kishida had been considered reluctant to cut taxes because his government must find the funds to double Japan’s Defence budget within five years as planned while also trying to counter the impact of Japan’s low birth rate and rapidly declining population.

Mr. Kishida’s pledge on tax breaks has been criticised by Opposition leaders as a vote-buying attempt because the proposals surfaced just before two by-elections held on Sunday that were seen as a litmus test for potential snap elections.

His Liberal Democratic Party secured a parliamentary seat representing Nagasaki in Sunday’s vote but lost in a combined district in Kochi and Tokushima to a candidate backed by the main opposition Constitutional Democratic Party of Japan.

“The results clearly show that many voters are dissatisfied by the government’s delayed economic measures to tackle rising prices,” said Jun Azumi, a senior CDPJ lawmaker.

Mr. Kishida told reporters that he takes the results seriously and that he will tackle important policies one by one.

“Now is the time for me to focus on that, and I’m not thinking about anything else,” Mr. Kishida said, denying that his tax cut proposal was related to elections.

The tax cuts would be part of a new economic stimulus package he plans to announce by the end of the month.

On the diplomatic front, Mr. Kishida in his speech reiterated the need to strengthen Japan’s military, given conflicts that are underway elsewhere, such as Russia’s invasion of Ukraine and the war between Israel and Gaza’s militant Hamas rulers.

Mr. Kishida also urged China to immediately lift its ban on Japanese seafood imports imposed in August when the tsunami-wrecked Fukushima Daiichi nuclear plant started releasing the treated radioactive wastewater into the sea.

The government is working to find new markets for the Japanese fishing industry that are less reliant on China, Mr. Kishida said.