CORPORATE TAX CUTS : ECONOMY

 

CORPORATE TAX CUTS : ECONOMY

NEWS: Tax cuts may have saved ₹3 lakh crore for India’s corporates

WHAT’S IN THE NEWS?

In 2019, India reduced corporate tax rates to 22% for existing companies (without deductions) and 15% for new manufacturing firms, boosting investments and competitiveness. This led to ₹3 lakh crore in corporate tax savings (FY20–FY24), but the effective tax rate dropped to 21.2%, with profits growing faster than taxes paid.

Corporate Tax Cuts (2019)

Pre-2019 Corporate Tax Regime:

  • Tax Structure:
  • Companies with annual turnover up to ₹400 crore: 25%.
  • Other companies: 30%.
  • High tax rates often discouraged investments and made India less competitive compared to global standards.

 

 

 

2019 Tax Reforms:

  • Revised Tax Rates:
  • Existing companies: Reduced from 30% to 22% (only if they forgo certain exemptions and deductions).
  • New manufacturing companies (meeting specific conditions): Reduced to 15%.
  • Objective: To spur investments, boost manufacturing, and make India a more attractive destination for business.

Estimated Tax Savings (2019-2024):

  • Over ₹3 lakh crore saved by India’s largest corporates due to the concessional tax regime.
  • Beneficiaries: Mainly large corporations, including the top 10% of BSE 500 companies.

Revenue Forgone (FY13-FY22):

  • Total revenue forgone due to corporate tax deductions: ₹8.22 lakh crore.
  • Revenue forgone represents tax incentives provided to encourage specific behaviors like investment or R&D.

Decline in Corporate Tax Rates:

  • Effective Tax Rate Before 2019:
  • Corporates paid around 30% or more on profits.
  • Effective Tax Rate Post-2019:
  • Dropped to 21.2% by FY24, benefiting companies significantly.

Corporate Profits vs Taxes Paid (FY20–FY24):

  • Corporate profits increased by 32.5%.
  • Taxes paid grew by only 18.6%, indicating a disparity due to the reduced tax burden.

Corporate Tax Overview:

  • A direct tax levied on the net income of companies (public and private) under the Companies Act.
  • Calculated after deducting operational expenses, business costs, and depreciation.

 

Revenue Forgone Definition:

  • The government loses potential tax revenue due to exemptions, deductions, or benefits offered.
  • Aim: To incentivize investment, production, and economic growth.