Lessons from a tax cut

Source: The post is based on an article “Lessons from a tax cut” published in the Business Standard on 27^th July 2022.

Syllabus: GS 3 The Union Budgeting

Relevance: Corporate Tax Collection; Ease of Doing Business

News:  In 2019, the government reduced the corporation tax rate to revive growth in the Indian Economy. The article analyses the results of tax reduction.

History of Corporate tax rate reforms in India

(A) 1990s Period

(1) In 1991, the corporation tax rate was raised from 40% to 45% because of revenue concerns. However, the tax was brought back to 40 percent in the year 1994.

(2) In 1997, the surcharges were abolished and tax was reduced from 40% to 35%.

(B) 2000s Period

(1) From 2000 onwards, the surcharges were reintroduced. Also, the corporate tax was raised to almost 36-38% for the next five years.

(2) In 2005, the corporation tax rate was reduced to 30%. However, the actual rate was about 33% along with the surcharge.

(C) Post-2015:

In Budget 2015-16, the Union Finance minister promised that the corporation tax rate would be reduced to 25% in a period of four years along with a phase-out of exemptions.

Since then, the corporate tax rate has been reduced by almost 10 percentage points. While exemptions and concessions were phased out.

On 1^st October 2019, the corporation tax rate was lowered to 17 percent, including surcharge and cess, from 29 percent. The Minimum Alternate Tax rate also was brought down from 21-22 percent to 17 percent.

Initially, the government had estimated that Rs 1.45 trillion in revenue will be foregone due to the cut in the tax rates. But subsequently, the government stated that some of this loss could be recovered through increased buoyancy.

How has the tax reduction impacted the government’s tax collections?

As per data for 2019-20, almost 16% of companies (accounted for about 62% of the total income), opted for the new scheme of lower tax rates and gave up exemptions and concessions. Therefore, total corporation tax collections in 2019-20 declined by about 16% to Rs 5.57 trillion, compared to Rs 6.63 trillion in 2018-19.

However, the latest provisional unaudited numbers with the Controller General of Accounts for 2021-22 show a changing situation now.

Corporation tax collections rose to Rs 7.12 trillion. But in terms of their share in GDP, corporation tax collections in 2021-22 were still at 3%. It was marginally lower than the 3.5% seen in 2018-19.

What should be done?

A stable tax regime having tax cuts with fewer exemptions results in revenue buoyancy. This happens due to improvement in compliance and wider coverage.

Therefore, the corporation tax revenues collection might improve in the year ahead. There would be overall collections buoyancy due to dispersion of tax liability to a larger number of companies in different income levels, if present trend continues.