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Effective tax rate burden rising for India Inc
February, 25th 2008
Around 3.5 lakh companies in the country hope to lower their tax burden in the next financial year.

The prevailing corporate tax rate is 33.99% and the companies expect the government to scrap the surcharge or lower the basic rate of 30%. The buoyancy in corporate tax revenues may bolster their case for a rate cut.

But what is the effective tax paid by India Inc? Effective tax is taken as the ratio of tax amount disclosed by a firm in its financial statement to profit before tax.

Factoring in all the exemptions, a large number of companies have paid around Rs 24 as tax on a profit of Rs 100 till December 2007. This is based on an analysis of 3,070 listed companies from ETIG database.

What this means is the effective tax liability of India Inc is 24%. The catch, however, is that it has gone up in two years ago.

The analysis shows the effective tax rate on income earned in 2005-06 was 22.5%, which this rose to 23.66% in 2006-07. That is a significant increase when considered in absolute terms as the total corporate tax paid by the sample amounted to Rs 75,039 crore.

Normally, companies file tax returns based on tax payouts in the previous fiscal. So, the government data to corroborate the trend will be available only later.
There is an increase in the effective tax rate if either base corporate tax rate goes up or compliance improves or some cushions like tax holidays are withdrawn.

The expiry of time-bound exemptions like a five-year tax holiday is believed to have pushed up the effective rate of some sectors. Other reasons that could increase the effective tax are inclusion of past losses or a dip in the depreciation amount.

Leading the pack were banks and cement companies who made more profits during the period. The effective tax liability in the sectors saw a whopping 6% jump. Next were companies in steel, other metals, automobiles, mining and shipping.
Interestingly, the effective tax rate dropped marginally for the IT sector which is lobbying for the continuation of tax breaks on export profits.

So was the case for sectors such as pharmaceuticals, hotels, sugar and telecom service providers.

The ETIG analysis is based on the financial results declared by companies and, hence, may not match the effective tax rate computed by the government, but it signals a trend.

The finance ministry had estimated the rate at 19.26% in 2006-07, based on a sample of three lakh companies that had filed tax returns. According to a top government official, the effective tax rate of companies could be 20% in 2007-08, given that they still enjoy major exemptions.

These include tax holiday on profits of companies developing infrastructure facilities, tax breaks on export profits for units in software technology parks and tax benefits for Jammu & Kashmir and backward areas, among others.

The effective tax rate would go up if exemptions are removed or if there is a change in the tax behaviour of taxpayers, a finance ministry official said.

With polls just a year ahead, the UPA government may prefer a status quo on exemptions to companies. The extra corporate tax collections could offset the revenue loss on a surcharge cut.

Indications are the corporate tax revenues would surpass the Budget estimates of Rs 1,68,000 crore by Rs 20,000 crore.

International comparisons show the countrys corporate tax rate is higher than Malaysia (27%), Russia (24%), Thailand (30%) and China (33%), but lower than the US (40%).
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