Get More Info

  • Views Search

    Portfolio Tracker
  • : Corporate tax: Are we paying enough?
  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  JUNE 28, 2004

    Corporate tax: Are we paying enough?

    As the budget is drawing near, the Confederation of Indian Industry (CII) urged the Government recently to not only reduce corporate tax rate from the existing 35% to 30%, but also remove the surcharge of 2.5%. They also urged the government to bring farm income under the tax net. The CII is also asking for doing away with Minimum Alternate Tax (MAT) so that corporates can pay equitable tax.

    Since we Indians, always look to the west for inspiration, we tried to fish out how India Inc. compares with the US Corporations in terms of taxes paid. Do Indian corporations pay abysmally high rates of taxes as compared to the developed countries?

    The peak corporate tax in the US is 35% plus 5% state tax, Japan stands at 42%, Germany at 39.6% and UK at 30%. Among Asian counterparts, Korea has corporate tax rate of around 30%. Looking at the above figures, it becomes clear that India Inc. tax rates compare well with most of the developed counterparts. The trend among global economies (including India) over the last 15 years has been a consistent decline in the tax rates. So, there may be a case for bringing the corporate tax marginally down, but more or less India Inc. is in line with global peers.

    But before we jump to any conclusions let's find out, how much did the top corporates actually pay as taxes (excluding deferred taxes) during FY04. Out of the BSE 30 companies, only 3 corporates - ONGC, Tata Power and BPCL paid over 34% as effective tax rate. Overall, only 8 corporates paid taxes over 30%. 14 companies effective tax rate was lesser than 20%. In effect, nearly half of the BSE 30 constituents paid below 20% tax. The balance 8 companies paid between 20% to 30% as effective tax rate.

    Of the Dow 30, 6 companies paid tax above 35% in 2003, 13 companies' effective tax rate was between 20% to 30% and the rest 11 paid below 20% tax.

    The reason why half of the top India Inc. companies pay lesser than 20% as tax is because they are either in the infrastructure sector or have set up plants in backward areas with tax exemptions. That is perhaps why the CII is asking for doing away with MAT, as it will increase the tax contribution from India Inc.

    But the anomaly becomes clear if we segregate these 30 companies, based on the segment they operate in, i.e. services, manufacturing and agriculture & allied. As per RBI's FY03 revised estimates, services accounted for a lion's share (56%) of the GDP, agriculture contributed 22% to GDP and the balance 22% came from manufacturing.

    Of the BSE 30, 16 companies are from the manufacturing sector, 12 from the services and 2 (HLL and ITC) from the agri-allied sector. Of the total profit before tax of Rs 561 bn earned by them in FY04, a huge 63% was contributed by the manufacturing companies, which form only 22% of GDP. Meanwhile, the 12 companies that represent the services sector (56% of GDP) on the Sensex, contributed only 28% to the total profit before tax.

    Sensex stats
    (Rs m) Profit before tax Tax Effective tax rate Contribution to PBT Contribution to tax
    12 services 159,278 33,965 21.3% 28.4% 24.3%
    16 Mfg 355,844 94,051 26.4% 63.5% 67.4%
    2 Agri 45,640 11,536 25.3% 8.1% 8.3%
    Total 560,763 139,552 24.9% 100.0% 100.0%
    (*excluding deferred tax)

    Of the total tax collected (Rs 140 bn), 67% once again came from manufacturing companies. The services sector paid only 24% of the total tax bill of BSE Sensex. There in lies the anomaly.

    If we compare these stats with the Dow, the difference becomes even clearer. The Dow 30 companies are distributed equally between services and manufacturing i.e., 15 companies each from both sectors. Their contribution to the profit before tax and tax paid is also equitable, as seen in the table below.

    Dow facts
    (US$ m) Profit before tax Tax Effective tax rate Contribution to PBT Contribution to tax
    15 mfg 114,154 29,136 25.5% 47.2% 48.4%
    15 services 127,544 31,005 24.3% 52.8% 51.6%
    Total 241,698 60,141 24.9% 100.0% 100.0%

    Now it must be clear, why the finance ministry is looking at increasing tax quantum from the services sector. The aforesaid figures indicate that the services sector should gear itself for a higher tax liability going forward.

    One thing is clear that the Indian tax structure has to be further simplified, which will not only widen the FM's tax net, but also result in better compliance. One must remember that India's overall Tax to GDP ratio is amongst the lowest in the world. More sections of the country have to start contributing to the tax net. The sooner this process is started, the better for India's development.

  • Get the budget special issue of Money Simplified, our free quarterly publication. Click here!

    Its about selecting the right stock... the right price!

    Equitymaster follows the value-investing approach to selecting stocks for investment. Subscribe to our premium research today!

    More Views on News

    Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

    Jun 1, 2020

    Is too much data hurting your quest for market beating returns?

    Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

    Apr 29, 2020

    Ajit Dayal on how the mutual fund industry robs you of your wealth.

    This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

    Oct 16, 2019

    If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

    Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

    Aug 16, 2019

    Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

    3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... (Views On News)

    Jun 28, 2019

    Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

    More Views on News

    Most Popular

    How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

    Sep 11, 2020

    This is how you can apply the greed and fear cycle in the market to pick stocks.

    I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

    Sep 7, 2020

    Things are not often what they seem in the market and how you can take advantage of this.

    The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

    Sep 7, 2020

    The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

    This Could Be the Best September for Auto Stocks (Profit Hunter)

    Sep 11, 2020

    Here's why I think this month could be a great for auto stocks.


    © Equitymaster Agora Research Private Limited |
    Why Personalfn? | Why Equitymaster? | Terms of Use | Contact Us | About Us