Why industry missed the tax exemption bus

BUDGET & THE ECONOMY

Companies are paying much less than the peak incidence of corporation tax.

The latest available data on various tax preferences gives a definitive hint towards why Finance Minister P Chidambaram chose not to lower the corporation tax rate.

While the data shows that India Inc's effective tax rate has improved marginally over the last two years, companies are still paying much less than the peak incidence of corporation tax.

According to the expanded revenue foregone statement in this Budget, the effective tax rate for corporate India stood at 20.60 per cent in 2006-07, marginally higher than the 19.26 per cent clocked in 2005-06, but substantially lower than the statutory tax rate of 33.66 per cent.

A sample set of 3,28,061 companies across industry sectors had a total effective tax liability (inclusive of surcharge and cess) of Rs 1,14,316 crore during financial year 2006-07.

In addition, they paid Rs 4,251 crore as fringe benefit tax and Rs 9,674 crore as dividend distribution tax during the year.

The sample companies reported profits before tax of Rs 5,56,190 crore but declared a total taxable income of Rs 3,41,606 crore in the year.

The revenue foregone on account of various deductions rose to Rs 58,655 crore in 2007-08, over Rs 45,034 crore, a sharp rise on account of accelerated depreciation, which rose from Rs 641 crore in 2005-06 to Rs 7,396 crore in 2006-07.

The sample companies are spread across 74 different industry categories.

Interestingly, 787 security agencies out of the sample had the highest effective tax rate of 37.80 per cent in 2006-07, while the lowest effective rate stood at 2.46 per cent for 10,691 agro-based industries.

The revenue foregone on account of various tax incentives and deductions available to individual taxpayers rose from Rs 29,130 crore in 2006-07 to Rs 38,107 crore in 2007-08.

The highest amount of revenue foregone (Rs 29,647 crore, which is nearly 78 per cent of the total) was on account of deductions available for investments and payments under Section 80C of the Income Tax Act.