A Ficci-PwC joint study concludes that big corporates pay over 35% of their profits as taxes, and has argued for a substantial cut in taxes. The government has, on the other hand, argued in the past that the tax system is riddled with subsidy payments to preferred taxpayers including corporates.
The effective average corporate tax rate, it claimed in 2008-09 budget, was only 20.6% against the statutory tax rate of 33.66%. How can the governments version vary so much from that of the Ficci-PwC study? The study includes what it calls business taxes taxes other than corporate ones such as stamp duty and direct taxes like dividend distribution tax that are a charge on the profit & loss account that a corporate pays to the government while calculating the total tax rate.
These levies, finds the study, are about 40% of corporate taxes and take the average total tax rate to nearly 36% for the sample of 41 large companies. The government has gone for a simpler measure of corporate taxes as percentage of pre-tax profits to underscore the low effective rate of taxation.
The 20.6% effective tax rate is, however, a sweeping average of over three lakh companies that include those with high effective tax rate, with fewer exemptions.
Clearly, the picture is one of a complex tax structure and cumbersome administration. Corporates would point to the plethora of taxes and contributions, which also increase administrative costs. (World Banks 181-country Doing Business survey ranks India a poor 169 on the paying taxes parameter.)
The government could easily argue that the large number of exemptions, deduction, rebates, credits and special rates, make corporate tax planning (in certain cases even evasion) that much easier for companies. It reckons that the revenue foregone because of various exemptions could be as much as Rs 2,78,644 crore in 2007-08, nearly 50% of gross tax collection that year.
A complex regime and high taxation could well be the reason why many small and medium companies operate in the informal sector even as it denies them the many benefits of operating in the formal economy, including access to cheaper credit. Clearly, there is a case for a cleaner taxation regime for a more informed debate on corporate taxation.