The effective rate of taxation in the case of companies could be defined as the ratio of tax payable to the total profit before tax, expressed as a percentage. The difference between the effective rates of taxation and statutory rate of taxation is mainly on account of various direct tax incentives. These incentives reduce the amount of tax payable, lowering the effective rate of tax. The major tax incentives provided to the companies are –
(a) profit-linked deductions,
(b) deductions on scientific research,
(c) accelerated depreciation and
(d) investment-linked deductions.
It is these incentives that are primarily responsible for a low effective rate of taxation. The effective tax rate for FY2010-11 was 24.1 per cent and 23.9 per cent in FY2009-10, which were substantially lower than the statutory tax rate of 33.9 per cent. Two hundred sixteen companies with profits before taxes (PBT) of Rs. 500 crore and above accounted for 55.8 per cent of the total PBT and 53.4 per cent of the total corporate tax payable. Hence, there was slight regressivity among companies in their payment of corporate income tax.
Out of the entire revenue foregone, the largest portion is accounted for by profit-linked deductions, (Rs. 19,881 crore) and accelerated depreciation (Rs. 33,243 crore). Together, these amounted to Rs. 51,000 crore out of a total foregone revenue of Rs.57,000 crore. It needs to be pointed out that these work more to the benefit of larger companies in the corporate sector. This issue is proposed to be addressed in the Direct Taxes Code (DTC) by phasing out profit-linked deductions, and opting for investment-linked deductions. By its very nature, there cannot be a study of the ‘projected revenue gain’ after phasing out profit linked deductions. This is because growth of new businesses and expansion of existing businesses depend upon several inter-related macroeconomic factors such as GDP growth rate, demographics, exploitation and exploration of natural resources, general business climate, international business climate etc. from which isolating a specific direct tax measure and estimating its impact would not be a feasible exercise. However, as a rough estimate, it can be seen that the current effective tax rate of the corporate sector is about 24 per cent whereas the statutory rate is 30 per cent. Therefore, at the same level of corporate tax, if profit-linked deductions and accelerated depreciation were to be totally phased out, the rise in the effective tax rate would give some indication of whether the rise has been noticeable.
While the revenue forgone in the non-corporate sector has been going up, the revenue forgone in the corporate sector has come down from 58.35 per cent to 54 per cent over the period FY2006- 07 to FY20 10-11. Although the corporate sector has expanded manifold during these years, revenue growth from the sector has not increased proportionately as the statute is still riddled with exemptions/incentives given specifically to this sector.
Source- Third Report of the Tax Administration Reform Commission (TARC) (F. No. TARC/Report/36/2014-15 Dated 30.11.2014)