Stressed India Inc’s corporate tax outflows grow faster than profits

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Updated: July 22, 2019 4:27:59 PM

Several factors have been behind the government raking in higher taxes from a stressed Corporate India.

AMRG & Associates’ Mohan said many unlisted companies are now reporting profit at much higher percentage of sales — even 40% or thereabouts in some cases — as GST has closed the avenues for evasion.

The growth in India Inc’s earnings remained subdued in recent years — in FY18, ratio of corporate profits to GDP fell to a 15-year low — but firms’ tax outgo rose at a steady pace during the period. Of a sample of 3,486 listed companies tracked by Capitaline, taxes paid as a percentage of operating profit grew from 14.9% in FY16 to 16.1% in FY19; against net profit, the tax outgo of these firms rose from 42% to 51% in the period.

Several factors have been behind the government raking in higher taxes from a stressed Corporate India. But phasing out of profit-linked incentives that pushed the effective corporate tax rate higher, stricter implementation of anti-avoidance rules and the introduction of GST which facilitated more efficient cross-matching of direct and indirect tax data are cited by analysts as the chief ones.

“Stringent provisions on related party transactions, a more probing environment triggered by the role of independent directors and audit panels, increased corporate governance, introduction and application of anti-avoidance rules in IT Act are among the reasons that could be at play,” Daksha Baxi, head of international tax at Cyril Amarchand Mangaldas, said.

Further, over the last three years, loss-making firms are not being given tax refunds in the same year, and their number has risen in recent years.

Rajat Mohan, partner at AMRG & Associates, said: “In the past three years, there has been an increase in the surcharge, leading to a rise in effective corporate tax rate, which is further accentuated by exemptions being phased out.”

Though marginal corporate tax rate has been coming down since the FY15 Budget, the benefit of this has been limited to small and medium enterprises; the bigger firms that pay the bulk of assorted direct taxes (corporate tax/MAT, DDT) has been deprived of any tax relief.

Corporate tax rate, including surcharges, for large domestic companies is close to 35% now, while the same for foreign ones is about 44%. While the growth in personal income tax collection by the government has fallen from 19% in FY18 to 13% in FY19, its corporate tax revenues continue to be robust. Goods and services tax (GST) collections witnessed only 10% growth in FY19.

In FY 18, the tax paid by the companies in the sample declined 1% year-on-year but the total corporate tax collections by the government grew 18%, thanks to unlisted companies. Experts said the introduction of GST was driving the higher tax payout by unlisted firms.

“GST is certainly playing a role in forcing many hitherto unorganised sectors to come into the formal economy fold. Transparency has improved and the tax authorities have also been able to communicate among themselves and share information and data,” Sudin Sabnis, director at Nangia Advisors(Andersen Global), said.

AMRG & Associates’ Mohan said many unlisted companies are now reporting profit at much higher percentage of sales — even 40% or thereabouts in some cases — as GST has closed the avenues for evasion.

 

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