When the finance minister presents the Finance Bill, the Budget Division of the Ministry of Finance prepares several documents which are also laid before the Parliament. One such document is the ‘Revenue Foregone Statement’. It was first presented during Budget 2006-07. A second edition of the statement was presented during Budget 2007-08 as an annexure and also as a standalone document entitled ‘Statement of Revenue Foregone’. The intention behind issuing the document is perhaps to bring about transparency in matters of tax policy. A cursory glance over this year’s statement suggests that for corporate taxpayers, the effective tax rate is 22.24 per cent, as against the rate of 20.60 per cent clocked in during 2006-07. Sample companies with profits before taxes (PBT) of Rs 500 crore and above accounted for 54.98 per cent of the total PBT and 54.02 per cent of the total corporate income tax payable. However, their effective tax rate was only 21.85 per cent, in comparison to an effective tax rate of 24.04 per cent for sample companies having PBT of up to Rs 1 crore.
The ratio of total income to PBT is much higher for companies with PBT of up to Rs 1 crore (76.93 per cent) than that for the total sample (67.44 per cent). This indicates that lesser deviance from PBT in the case of relatively smaller companies as compared to larger companies because the latter avail of higher tax concessions.
The above figures signify the importance of small- and medium-size enterprises (SME), both in terms of their contribution to the government’s exchequer and their provision of pervasive employment opportunities. Another important fact which needs to be noted is the discrepancy in effective tax rates between the manufacturing sector and the service sector, at least in regard to the companies analysed in the survey. The effective tax rate for almost all industries is below the statutory level, but the statistics disclosed in the Revenue Foregone Statement reveal that it is especially low for IT-enabled and BPO service providers, at 15 per cent, and for software development agencies, at 12 per cent. These numbers are attributable to the tax concessions which these industries currently enjoy.
The Income Tax Department had received 410,451 electronically filed corporate returns for the financial year 2007-08 by 31 March 2009. Yet the approximate number of registered companies in India approaches 800,000.
The irresistible inference is that the corporate tax base still needs to widen relative to the total number of companies registered in India. Service sector companies do not shoulder their share of the burden as compared to small- and medium-size enterprises. If policy makers need to withstand and overcome the challenges arising from continuing fiscal deficits, then it is imperative that these anomalies be seriously considered and evaluated.
The author is partner, Amarchand & Mangaldas & Suresh A. Shroff & Co
