Corporate tax to GDP ratio to be 13-year-low in FY20
HYDERABAD: Corporate tax revenue as a percentage of GDP will be at a 13-year-low in FY20, say thanks to the recent tax cuts and a slowing economy. In Budget 2020, the Ministry of Finance has revised FY20 corporate tax collections downwards to Rs 6.1 lakh crore from Rs 7.6 lakh crore estimated in July.
While the slowdown affected the profitability of companies thereby resulting in lower tax payout, the government is foregoing Rs 1 lakh crore or 0.5 per cent of the GDP due to the reduction in corporate tax rates to 22 per cent from 30.
The double whammy meant that the corporate tax-to-GDP ratio will touch 2.98 per cent in FY20 — a 13-year-low. The last time the ratio fell below this figure was in FY06 when it stood at 2.74 per cent. The downside of lower corporate tax collections is, it increases the reliance on personal income taxes. As a proportion of GDP, personal income tax revenue has been steadily rising from 1.88 per cent FY09 to 2.7 per cent in FY20.
Last September, when corporate tax rates were reduced from 30 per cent to 22, it was expected to kick off a virtuous cycle, by encouraging businesses to invest more in new factories or expanding existing facilities and in turn boost growth, wages and spinning off more tax revenue to help offset the revenue foregone by the exchequer. However, experts say, the proposed trickle-down effect will come with a lag of several quarters.
A low tax-to-GDP ratio limits the government from spending including on productive assets like infrastructure, while a higher ratio implies a wider tax base, the government’s efficiency in financing its expenditure and lower reliance on borrowings, domestic or foreign. India, despite witnessing higher growth rates, struggled to widen the tax base.
Worryingly, last week, the government sharply reduce its FY20 tax-to-GDP ratio from 11.7 per cent envisaged in July to 10.6 per cent now. But that’s not the only downside. While tax collections in FY21 through FY23 are expected to grow in double digits, the tax-to-GDP ratio is expected to remain around 10.7 per cent in FY23.
One reason is the slightly muted growth in indirect taxes at 10.7 and 11.1 per cent respectively in FY22 and FY23. For FY21, direct tax-to-GDP is pegged at 5.9 per cent, while indirect taxes will be around 4.9 per cent.