Corporate Tax Incentives in India: Efficient and Fair?
R. Kavita Rao and Sacchidananda Mukherjee
National Institute of Public Finance & Policy (NIPFP), New Delhi
25 July 2017
What shall we do with Company Tax? Tax and Transfer Policy Institute, ANU.
Context
• Fairness of tax system and voluntary compliance
– Administrative fairness
– Personal income tax with corporate tax
– Horizontal and vertical equity
– within corporate tax – between different kinds of corporates – across size classes, sectors, capital intensity and so on.
Objectives
i. Whether the incentives discriminate across size classes of firms?
ii. Where the incentives are effective in achieving the intended objectives? and
iii. Finally, whether the government’s stated objective of a reduction in the tax rates and in exemptions would bring in a level playing field in India and for India in comparison with similar countries.
Structure of the Presentation
• How corporate tax in India fairs across countries
• Equity across size classes of companies
• Equity across sectors
Corporate Tax Reform
• Corporate Tax Reforms in India
– The size class wise variation in tax rate was eliminated in 1983-84
– The distinction between closely held and widely held companies was removed in 1994-95
– a mild degree of progressivity has been introduced through the way surcharges have been defined on companies
Fairness across Countries
• The statutory tax rates (STR) of India do not appear to be higher than the average tax rate for other countries. In other words, India does not appear to be an outlier in this comparison.
• There exist a number of incentives (exemptions) and concessions that are provided in the tax regime, which change the impact of the tax on companies.
• India belongs to the group of countries which have neither high nor low effective corporate tax rate.
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STR
(%
)
Corporate Tax Rate (STR, %): 2016
Source: https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html
Source: Revenue Foregone Statement, Union Budget
Corporate Tax Incentives: 2013-14 to 2015-16 (INR 10 milion)
Description of incentive 2013-14 2014-15 2015-16
Area-based exemptions 7,189 9,015 6,559
Special economic zones 18,873 18,630 21,218
Incentives for R&D 7,592 8,450 10,131
Accelerated Depreciation Benefits 34,278 41,531 50,027
Infrastructure 3,353 4,334 5,130
Power 9,937 9,756 11,621
Mineral Oil 6,245 3,227 5,986
Telecom 1,431 1,745 1,233
Others 2,247 4,034 3,272
Total 91,144 100,722 115,177
Less Recoveries through Minimum Alternative Tax (MAT)
33,351 35,655 38,318
Net Revenue Foregone 57,793 65,067 76,859
Total Corporate Income Tax Liability 257,858 298,205 357,968
Revenue Foregone as Percentage of Total Corporate Income Tax Liability (%)
22.4 21.8 21.5
0 5 10 15 20 25 30 35
Japan
United States
France
South Africa
Germany
Africa
Asia
South Korea
Europe
Australia
Latin America
Canada
India
China
Sweden
United Kingdom
Taiwan, ROC
Switzerland
Singapore
Tax Havens
Middle East
(in %)
NBER’s Comparison of Average Book Effective Tax Rates, 2006 to 2011
Source: Kevin Markle and Douglas Shackelford (2014): http://www.nber.org/papers/w19621
Fairness across Size Classes
• Comparison of ETR across Companies in India – smaller companies face higher ETR as compared to
larger companies. • companies having annual profit before tax (PBT) up to INR
100 million face higher effective tax rates. – higher tax rate could become a barrier for new companies to
enter into the market
• small companies face ETR which is higher than STR – this is due to divergence between growth rate in taxable income
(derived under IT Act) and PBT (based on Companies Act)
• STR is higher for companies having annual PBT above INR 100 million, their ETR is lower as they derive larger benefits from the existing tax exemptions.
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FY2011-12 FY2012-13 FY2013-14 FY2014-15 FY2015-16
Effe
ctiv
e Ta
x R
ate
(%)
Companies having Annual PBT up to INR 100 million Companies having Annual PBT INR 100 to 500 million
Compnaies having Annual PBT above INR 500 million
Comparison of Effective Tax Rates across Companies by PBT Categories
Source: Revenue Foregone Statement, Union Budget
Comparison of Corporate Statutory and Effective Tax Rates across Companies: 2011-12 to 2015-16
Financial Year
Statutory Tax Rate (STR) (%) Effective Tax Rate (ETR) (%)
Annual Income up to INR 100 million
Annual Income above INR 100
million
Annual PBT up to INR 100 million
Annual PBT above INR 100
million
2011-12 32.45 32.45 31.65 21.87
2012-13 32.45 32.45 31.38 21.45
2013-14 32.45 33.99 36.69 21.74
2014-15 32.45 33.99 36.22 23.46
2015-16 33.06 34.06 41.19 26.87
Source: Revenue Foregone Statement, Union Budget
Revenue Foregone as a Percentage of Total Income Tax Revenue: 2006-2008
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Source: OECD (2010): Tax Expenditure of OECD Countries & Govt. of India: Union Budget 2009-10.
Fairness across Size Classes (Contd.)
• Companies contributing more than half of the corporate tax collection are not able to reap the benefits of the existing tax incentives.
• Concentration of companies are skewed towards lower ETRs – Sectors where ETRs are lower face greater
competition than sectors with higher ETRs.
• Existing tax structure and incentives are not conducive to encouraging competition across all sectors equally.
Distribution of Companies by Effective Tax Rate: 2015-16
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40.0
ETR < 26.35% 26.35% < ETR <29.60%
29.60% < ETR <32.15%
ETR ≥ 32.15
(in
%)
Percentage share of Total No. of Companies (%)
Percentage share of Total PBT (%)
Percentage share of Total Corporate Income Tax Collection (%)
Source: Revenue Foregone Statement, Union Budget
Inequality in Corporate Tax Liability
Year
Percentage
Share of Sectors
having ETR
higher than
Average ETR (%)
Percentage Share
of Companies
having ETR higher
than Average ETR
(%)
Share of PBT of
Companies
having higher
than Average ETR
(%)
Share of Tax of
Companies
having higher
than Average
ETR (%)
2011-12 59.5 59.6 53.1 60.0
2012-13 61.3 63.5 52.6 62.3
2013-14 70.7 68.3 57.1 65.0
2014-15 66.7 52.4 47.6 56.3
2015-16 61.3 46.3 46.8 53.4
Source: Revenue Foregone Statement, Union Budget
Fairness across Sectors
• Sectoral distribution of corporate tax is not uniform
– In 2015-16, 46 sectors (out of 75 sectors for which data is presented) had ETRs higher than the average ETR (i.e., 28.24%)
– The benefits of tax incentives are reaped by a few sectors, while others faced higher ETRs
Average Corporate ETRs across Sectors
Sector
ETR (%)
2012-13 2013-14 2014-15 2015-16 2012-16
Manufacturing Industry 21.10 21.96 22.06 25.86 22.83
Commission agents, Builders and Contractors
19.25 19.44 23.56 28.46 22.41
Service Sector 22.51 22.77 22.90 27.56 24.17
Trading 26.18 26.93 26.93 29.48 27.48
Professionals 14.98 25.85 31.39 32.09 24.57
Financial Service Sector 25.44 26.89 30.42 33.80 29.15
Entertainment Industry 25.39 24.95 30.90 29.45 27.79
Others 22.19 24.09 31.02 32.49 30.64
Average All Sectors 22.44 23.22 24.67 28.24 24.78
Source: Revenue Foregone Statement, Union Budget
ETRs across Sectors: 2012-13 and 2015-16
2012-13 2015-16
Top
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tors
hav
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Hig
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t A
vera
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ETR
SS: Security agencies (35.62) SS: Courier agencies (41.7)
SS: Courier agencies (34.51) FSS: Banking companies (40.3)
SS: Consultancy services (34.29) SS: Security agencies (38.9)
FSS: Chit funds (33.28) FSS: Financial institutions (37.9)
SS: Beauty parlours (32.85) C: Forest contractors (37.6)
SS: Forex dealers (32.85) C: Excise contractors (35.9)
SS: Advertisement agencies (32.7) MI: Electronic including computer hardware (35.5)
SS: Travel agents, tour operators (31.73) EI: Motion picture producers (35.5)
C: Excise contractors (31.55) EI: Film distribution (35.1)
MI: Rubber (30.7) SS: Advertisement agencies (34.7)
Average ETR: 22.44 Average ETR: 28.24
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MI: Steel (15.82) MI: Steel (24.3)
MI: Tea, coffee (15.59) MI: Drugs and pharmaceuticals (24.2)
MI: Fertilizers, chemicals, paints (14.08) MI: Vanaspati and edible oils (23.5)
MI: Power and energy (13.67) MI: Paper (23.3)
EI: Film laboratories (12.21) MI: Petroleum and petrochemicals (22.8)
P: Others (11.33) MI: Tea, coffee (22.8)
P: Charted accountants, auditors, etc. (10.15) MI: Power and energy (21.9)
MI: Sugar (9.98) FSS: Leasing companies (21.6)
C: Mining contractors (6.98) MI: Cement (21.4)
FSS: Leasing companies (1.5) MI: Sugar (19.3)
Conclusions • Corporate tax incentives provide benefits differently • They are skewed in favour of larger companies • There is merit in the government’s stated goal of reducing the
STR to 25%, along with a reduction in tax incentives • Government may face some hurdles in achieving its stated
goals if there are pressures of international tax competition. • Increasing protectionism in the international climate might
provide a window of opportunity where international tax competitions are blunted
• Periodically cleaning up the tax regime needs to be an ongoing effort
• Periodic assessments of the cost and benefits of tax incentives would provide the necessary information to weed out any ineffective incentives.
Thank you
