A fiscal stimulus of Rs 1.45 lakh crore in the form of tax exemptions has finally brought cheers to both corporate and the stock market, as the government on Friday cut corporate tax rates for domestic companies that do not avail of any tax incentive to 22 per cent from the existing 30 per cent. Effective corporate tax rate after surcharge will amount to 25.17 per cent. For new manufacturing companies, the existing tax rate of 25 per cent has been brought down to 15 per cent.
Corporates accounted for about 1.6 per cent of total taxpayers, as per the tax returns for assessment year 2017/18 but they contributed over 55 per cent to income taxes during the same year. "It is a bold move by the government, considering the fact that there has been a dip in GST collections. This could be a good move to break the catch-22 situation and the improvement in business is likely to increase tax collections," says Aakash Uppal, Partner/ Tax & Regulatory Services, BDO India.
Data showed only 20 Nifty companies in 2018/19 paid more than 30 per cent effective tax rate and accounted for 43 per cent of overall net profits. The effective tax rate of Nifty companies on an aggregate basis stood at 26 per cent, which will now come down to 25.17 per cent, according to a report by Kotak Securities. "Any company paying 33 per cent tax rate will see its earning go up by 12 per cent. Overall, we can see Nifty earnings going up by nearly 5-6 per cent in FY20 as the effective tax rate was already lower at 26 per cent. Add the sentiment booster angle and the way this will be taken positively by FIIs and local investors, we can expect the Nifty to rally by 9-10 per cent from today's low of nearly 10,700. Hence, 11,500-11,600 is very much possible on the Nifty without considering any other factor," said Rusmik Oza, Head of Fundamental Research, Kotak Securities.
The corporate income tax has undergone significant changes over the past few years. The distinction between closely held and widely held companies was done away with and tax rates were unified at 40 per cent in 1993/94. The corporate tax rate was brought down to 35 per cent in 1997/98 and the levy of tax on dividends in the hands of shareholders was eliminated. However, a new dividend distribution tax was introduced and levied on firms.
Corporate tax rates in India are one of the highest in the world. According to an OECD report, of the 94 jurisdictions covered, 18 had statutory tax rates equal to or above 30 per cent in 2018 with India having the highest statutory tax rate at 48.3 per cent, which includes a tax on distributed dividends. The average global corporate tax rates have fallen from 29.4 per cent in 2003 to 23.8 per cent in 2019. However, the average for Asian nations dropped much sharply by 9.1 per cent during the period. The corporate tax rates in India went down by around 6.8 per cent. The current rate cut will bring the country's corporate tax rate closer to the global average.
The corporate tax collection slowed down in 2018/19, registering a growth of 16.2 per cent, a tad below the 17.8 per cent growth witnessed in the previous year. It's share in the direct tax collection took a beating, falling from a high of 67 per cent in 2010/11 to 59.4 per cent in 2018/19.
The tax revenue from corporate, which averaged around 1.9 per cent of GDP between 1999/2000 and 2003/04 increased approximately to an average of 3 per cent between 2003/04 and 2006/07 and inched to its highest, that is, 4 per cent of GDP in 2007/08. It has been sliding ever since having a share of 3.5 per cent in GDP at current prices in 2018/19.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today