Even as a number of sectors are hoping for tax sops in the Union Budget 2023-24, a new study has found that the effective corporate tax rate hovers around 22% now, much lower than 25.17% specified by the government.

The Bank of Baroda research report, authored by its economist Aditi Gupta, has found that the effective tax rate for corporate income has declined from 27.6% in 2017-18 and 2018-19, to 22.8% in 2019-20 when the lower corporate tax rate came into effect. “Since then, there has been some further moderation in the effective tax rate which continues to hover around 22%,” it said.

Further, the effective tax rate in India is lower than several other emerging economies such as Brazil and Argentina, and even some advanced economies such as Australia and France.

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In the fiscal year 2021-22, the effective tax rate for 44.1% of the companies under review was between 25% to 30%, which was in line with the government’s position. Around 20% companies had a lower tax rate of between 20% to 25%, and another 17% had an effective tax rate of below 20. “The divergence between firms with respect to the effective tax rate is due to the extent of exemptions or subsidies taken by the particular business,” the study said.

Surprisingly, about 15.5% of the companies under review had an effective tax rate of over 30%. Most of these were concentrated in the finance, capital goods, chemicals and textiles sector.

“It is not new for companies to demand tax sops in the run-up to the Budget. Companies put forward a myriad of factors supporting their claim, ranging from higher input costs to waning domestic demand. However, as this study shows, the effective tax rate for companies has declined sequentially and substantially, since the government announced the cut in corporate tax rate in September 2019,” it said.

With an aim to make India globally competitive, the government has over the years lowered the corporate tax rates. The Union Budget 2019-20, had widened the scope of the lower tax rate of 25% to all companies having annual turnover up to Rs 400 crore. This was expected to cover 99.3% of all companies. A concessional tax regime of 22% for existing companies and 15% corporate tax was also introduced for newly incorporated domestic manufacturing units, provided they do not avail any specified deduction or incentive. This is available till March 31, 2024.

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According to the Union Budget 2022-23, the effective tax rate of the entire base of companies reporting profits was 22.54% for 2019-20 as against the rate of 27.81% reported in 2018-19. Updated data will be available in the upcoming Budget.

The study looked at a sample of 5,714 companies spread across both manufacturing and services sector and looked at the effective tax rates over the last 5 years from 2017-18 to 2021-22. After it removed companies with a negative profit before tax in any of the five years, the sample size reduced to 2,576 companies.