NEW DELHI: A Cut in corporate taxes and stagnant income tax rates in the last 10 years have led to a significant mismatch in pace of growth rate in corporate and personal tax collection, as per the tax experts. In this period, while the growth rate of corporate taxes has only been 8.9%, the income tax growth rate has been 15%, as per the government data.
In the last decade, the government has undertaken many reforms to simplify the corporate taxation system, and lowering of the corporate tax rates from 35% to 15% was the biggest reform. Meanwhile, the personal taxes have remained stationary or actually increased due to surcharge, without any additional deductions extended for individuals.
“Business taxation is an area which received immense attention globally with pillar two to reduce the corporate tax rate to a global minimum of 15% to pre-empt ‘race to the bottom’ by mobile (international) capital. Tax buoyancy (responsiveness of taxes to increase in GDP) of corporate tax is lower than that of personal income tax,” said Lekha S Chakroborty, professor at the National Institute of Public Finance and Policy (NIPFP). She said the effective tax rate of big firms is relatively lower than that of medium firms. “Lack of buoyancy in corporate tax rate is a reflection of macroeconomic uncertainties and lack of uptake in private investment due to lack of investor’s confidence,” She added.
Madan Sabanavis, the chief economist with Bank of Baroda, said corporate tax growth has lagged as corporate profits have fallen across several non-BFSI sectors due to rising input costs. “Lower profit before tax has meant slower growth in tax payments. Individual tax increases as the direction is fixed and incomes increase. Covid was the only phase when income fell,” he said.
As per him, only new and a few old firms which are not faring well, use lower tax rates. Aarti Raote, Partner, Deloitte India, said the main reason for income tax growth is the tax rates for personal taxes have remained stationary or increased due to surcharges. “Encouragement to MSMEs by the government has played an important role. Social welfare schemes, higher pensions, and direct benefits leading to higher income positively impact tax collection. Buoyancy in economic activity and higher salaries in the public and corporate sector raise income tax,” said Dr Charan Singh, CEO EGROW Foundation and former RBI Chair Professor of Economics at IIM- Bengaluru.
Corporate tax reform
In the last decade, the government has undertaken many reforms to simplify the corporate taxation system and lowering of the corporate tax rates from 35% to 15% was the biggest reform. Meanwhile, personal taxes have remained stationary or actually increased.