Low interest rates lift corporate tax mop-up

Interest outgo for the top 1,000 companies fell Rs 3,085 crore between FY00 and FY03.

The Laffer curve is alive and well in corporate India. In spite of corporate tax rates having been reduced, India Inc has paid more tax.

Nor are the higher taxes merely the result of higher operating profits""corporate tax as a proportion of operating profit has gone up over the years.

For the top 1,000 companies, this was 11.4 per cent in 1995-1996, changing marginally to 11.8 per cent in 1999-2000 and rising sharply thereafter to 16.6 per cent in 2002-2003.

The period 2000-2003 was the time when interest rates fell dramatically and capital expenditure was almost at a standstill. Clearly, lower interest and depreciation charges have helped fill government coffers.

Corporate taxes have risen at a faster pace than profits. While India Inc's top 1,000 companies saw their net profits rise by 88.5 per cent between 1999-2000 and 2002-2003, corporate taxes rose by 101.9 per cent.

Moreover, the rise in tax collection has occurred in spite of lower corporate tax rates. In 1991-2000, when the corporate tax rate was 35 per cent and the surcharge was 10 per cent, these companies paid corporate tax of Rs 9,380 crore. Three years later, with the surcharge reduced to 5 per cent, taxes amounted to Rs 18,941 crore.

Nor was the rise in corporate tax merely because the base of 1999-2000 was not a good year for industry. Even if we take 1995-1996 as the base""a period when industrial growth was very high and when the corporate tax rate was 40 per cent with a 15 per cent surcharge""the rise in corporate taxes of the top 1,000 companies from 1995-1996 to 2002-2003 was 195.8 per cent, while net profits rose by 93.57 per cent over the period.

Corporate tax as a percentage of profit before tax rose from 20.17 per cent in 1995-1996 to 27.86 per cent in 2002-2003. Clearly, the re-engineering of India Inc has benefited the tax collector more than the shareholder.

Interest outgo for the top 1,000 companies fell Rs 3,085 crore between 1999-2000 and 2002-2003, contributing almost 10 per cent to the rise of profits before tax over the period. Lower depreciation charges, owing to the lack of capital expenditure, also helped raise profits and taxes.