Moneycontrol
Feb 06, 2018 11:47 AM IST | Source: Moneycontrol.com

COMMENT - Why Mr Jaitley is justified in not reducing corporate tax rates

Not reducing corporate tax rate has been termed as a big miss by the finance minister. But data shows not many companies would have benefited from the cut

Shishir Asthana

The term ‘Corporate India’ is normally associated with only the top companies in the country. The smaller ones do not figure in the list. This line of thinking cannot be faulted as the top companies account for most of the sales and net profit generated by the corporate world.

For example, in the financial year 2016-17, the top 335 companies accounted for 61.2 percent of the total profit generated by 6 lakh corporate entities registered in India, 50.2 percent of the total income and 54.4 percent of the tax collected by the government.

Finance Minister Arun Jaitley in his budget, however, presented the case differently. At the start of his tenure as the finance minister, he had said that corporate tax rates would be brought down to 25 percent over the next five years. This statement was made without any strings attached.

In his recent budget speech, Jaitley did reduce the corporate tax rate but said this would be applicable to companies with turnover up to Rs 250 crore.  Jaitley said with this, the benefit of lower tax will be available to 99 percent of the registered companies in the country. Data shows that 99.76 percent of the companies have revenue below Rs 100 crore.

However, the market and captains of corporate India are not too happy with the announcement and feel they have been short-changed.

But the government has presented its rationale supported by data. Effective tax rate of companies with turnover above Rs 500 crore stands at 23.94 percent. Companies with turnover of Rs 100-500 crore pay tax at a rate of 28.98 percent while the highest rate of 29.43 percent is paid by companies with a turnover of Rs 0-1 crore.

Naturally then, lowering the rate to 25 percent would not have made any difference to companies with revenue greater than Rs 500 crore.

But the question is how are bigger companies able to pay lower taxes as compared to smaller ones. The answer lies in the concessions that are enjoyed by bigger companies on account of their size and flexibility.

Generally, when a state announces a tax holiday, it is the bigger companies who are first to migrate to these states. The smaller companies on account of various reasons including management bandwidth are restricted to the location of their origin. Bigger companies either move their employees to the new location or offer them a voluntary retirement scheme (VRS) or simply sack them. The size of these companies is so big that a tax holiday not only improves their profitability but makes them more competitive.

Many bigger companies are in the infrastructure space where they enjoy tax benefits under 80 I(A). Since the size of the project is so big the smaller companies do not have the balance sheet to even qualify for the bidding process. Ironically, the bigger companies outsource the actual work to smaller companies.

Some bigger companies, especially those in commodity products and with financial muscle, frequently announce expansion plans. This gives them the benefit of higher depreciation and allows them to lower their tax rate. Many of these companies only pay minimum alternative tax (MAT).

Even the benefit of the current corporate tax cut will ultimately reach the bigger companies. The smaller companies are generally suppliers to the bigger ones who work on a ‘cost-plus basis’.

The rate cut for companies below Rs 250 crore would mean higher profits for these companies. This is unlikely to go down well with the bigger companies who are their clients and would ask for a rate re-negotiation. Many companies, especially those who have a brand of their own, do not have a manufacturing setup and prefer outsourcing their requirements from small and medium enterprises. These companies end up paying higher taxes but would not think twice to squeeze every penny from their suppliers.

In the end, the ultimate beneficiary will be the companies who dictate terms with their suppliers because of their size.

No one enjoys paying taxes, be it the salaried employees or the giants of corporate India. The easiest way to increase your profit margin is by lowering taxes;  all that is needed, the thinking goes, is a mass wailing. Sometimes you get the pacifier, sometimes not. This was one occasion neither the salaried employees nor the (larger end of) corporate India got it.
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