When Small is Not Always Beautiful - Chart Of The Day 6 February 2018 - Equitymaster
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When Small is Not Always Beautiful
Feb 6, 2018


Large companies may seem to have missed the tax concession bus this time. This is after the recent budget proposal to reduce corporate tax rate to 25%, but only for companies with annual turnover of upto Rs 2.5 billion. However, a closer look at the budget documents paints a completely different picture.

As per the documents, large companies earning big profits pay much lower taxes because of the benefits they receive from various deductions and exemptions. So, while companies with profit before tax (PBT) of upto Rs 5 billion had an effective tax rate ranging from 28.11% to 29.43% in FY17, those with PBT of more than Rs 5 billion had a much lower tax incidence at 23.94% in the same year.

This is even below the required corporate tax target of 25%. Clearly, an additional cut in corporate tax rates for companies of this size are unnecessary. On the other hand, what is worrisome is that the small companies are unable to fully utilise tax incentives and concessions and this pushes up their overall tax liability.

But one way of overcoming this anomaly is by moving towards the regime of lower tax rates and exemptions. But here's the twist. Accelerated depreciation accounts for half of the gross tax incentives the government gives to encourage companies to undertake capital investments. Such companies are allowed to claim higher depreciation in tax calculation resulting in lower tax liability. And by withdrawing this benefit, the government does not want to risk the hopes of revival in the investment cycle at this juncture. Therefore, the possibility of a cut across the board in corporate tax rates remains a pipe dream for now.

Considering that small companies are unfavourably placed to avail of exemptions and incentives, the practice of gradually increasing the ceiling limit on turnover for lower tax rates seems to be a better alternative for now.

Data Source: Livemint, Budget documents

This Chart Of The Day was published in The 5 Minute WrapUp - Here's What You Should Do in this Market Crash

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