Though the actual corporate tax rate is 33.66%, the effective tax rate paid by India Inc is just 17%, thanks to an array of tax breaks. The finance ministry may push for pruning tax exemptions even as Indian industry seeks a lower corporate tax rate.
Corporates have been able to lower their tax liability mainly on account of tax breaks. Companies can claim several exemptions such as tax holidays for SEZs and software technology parks, 100% EOUs and backward area benefits. There are around 3.5 lakh corporate tax assessees in India. A similar exercise done for 2004-05 showed that the effective rate was 19.4%. The analysis titled Tax Expenditure under the Central System was incorporated, for the first time, in the 2006-07 Budget. It was based on a sample of 1,689 companies.
With the Budget just a few weeks away, policy managers are likely to factor in the calculations on the effective tax rate for FY06 while taking a policy decision on any rate change. Pruning of tax exemptions will bring the effective tax rate closer to the statutory corporate tax rate.
In FY06, the government cut corporate tax rate to 30% from 35%, but hiked the surcharge from 2.5% to 10%. Depreciation rates were lowered on general machinery, though the rate for new machinery was hiked. The FM had said that these measures would result in a near 3% relief in corporate tax rate. The relief was partly offset by the fringe benefit tax.
Corporate tax revenues during FY07 are growing at a fast clip, thanks to the buoyancy in GDP and better compliance. Collections were up 51.8% till December-end against the projected growth of 29%. The buoyancy in collections has prompted India Inc to pitch for a lower tax rate.
An independent analysis done by ET of 55 sectors showed an average effective tax rate of 21% during FY06. The effective tax rate has been calculated by taking the current tax paid by companies as a percentage of the profit before tax. The study shows that some of the highest effective tax payers were sectors like automobiles, capital goods, banks, metals, auto ancillaries and paints and varnishes. The fact that automobiles pays one of the highest effective tax rates perhaps indicates that this sector is not benefiting as much from exemptions.
There are some expected categories among the lowest tax paying sectors. These include IT, telecom, pharmaceuticals, power generation and cement. Tax exemptions are the reason for ITs low effective tax rate. Cement companies usually locate their plants in backward areas, making them eligible for tax benefits. Pharmaceutical companies, apart from having 100% EOUs for export also benefit from the 150% weighted deduction on research and development expenditure.