One of the reasons why the stock markets fell on budget day—apart from the foreign institutional investor tax residency status issue—was the increase in surcharge on corporate tax for domestic companies whose taxable income exceeded Rs.10 crore.
However, after four straight years of increase, the effective tax rate for corporate India had actually come down in 2011-12.
The effective tax rate reached 24.1% in 2010-11 as the government steadily reduced profit-linked deductions and imposed the minimum alternate tax. But it declined to 22.85% in 2011-12, also far lower than the statutory tax rate of 32.45%.
The budget documents provide a pointer to why this happened. One, the surcharge levied on corporate taxpayers whose taxable income exceeded Rs.1 crore was cut from 7.5% to 5% in 2011-12. Second, the number of firms that reported a loss increased from 35.19% of the sample size in 2010-11 to 37.34% in 2011-12 as the economic slowdown started taking its toll.
Just like the economic slowdown hits smaller companies more than bigger firms, the tax rules, too, are loaded in favour of the latter. The effective tax rate for firms which reported profits before tax (PBT) of more than Rs.500 crore was 21.67%, the second lowest among all categories. In contrast, firms with PBT lower than Rs.1 crore had the highest effective tax rate of 26.26%. This inequity has only been widening in recent years. In 2007-08, the gap between the effective tax rates of these two categories was 2.55 percentage points. By 2012-12, it had increased to 4.59 percentage points, indicating that recent changes to tax rules benefited the bigger firms.
Sure, in this year’s budget, the surcharge has been increased only for larger firms. However, larger firms also get incentives such as the 15% investment allowance for companies which are investing more than Rs.100 crore. Thus, this inequality in tax liability is not going to go away soon.