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Context:
In the years prior to the pandemic, two of the largest economies in the world, the U.S. and India cut corporate tax rates in an attempt to stimulate growth.
Corporate income-tax (CIT).
- The income-tax paid by domestic companies, and foreign companies on their income in India is corporate income-tax (CIT).
- The CIT is at a specific rate as prescribed by the income tax act subject to the changes in the rates in the union budget every year.
- While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within Indiae. is being accrued or received in India.
For the purpose of calculation of taxes under Income tax act, the types of companies can be defined as under:
- Domestic Company:
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- They are the one which is registered under the Companies Act of India and also includes the company registered in the foreign countries having control and management wholly situated in India.
- A domestic company includes private as well as public companies.
- Foreign Company:
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- Foreign company is one which is not registered under the companies act of India and has control & management located outside India.
A case of US experience in tax cuts
- The Tax Cuts and Jobs Act enacted by President Trump in 2017.
- It provided for a reduction of the tax rate on corporate income from 35% to 21%.
Positive impacts
- This increased corporate investment and led to higher economic growth and employment.
- This also led to technology upgradation and productivity, resulting in higher wages.
- Investment also increased from 8% to 14%.
Negative aspects
- However, long-term increase in GDP was meagre 9%.
- Wage increase was less than $1,000 per worker, lower than the expected $4,000 to $9,000.
- Long-run reduction in tax revenue was 41%.
Case of Indian experience in tax cuts
In 2019, India reduced corporate tax rates for existing companies from 30% to 22% and for new companies tax rate was reduced from 25% to 15%.
Impacts on:
Revenue collection:
There was a decrease in share of Corporate taxes in gross tax revenues from 32% in 2017-18 to 5% in 2024-25. A tax revenue loss was around ₹1 lakh crore in 2020-21.
Rural and Urban areas
- There was an increase in employment in insecure work and unpaid family work in rural areas.
- Real wages in rural areas declined and in urban wages were stagnant. Rural regular wage and urban regular wage was at a CAGR of 53%; and 5.75% only.
Employment:
There were large layoffs in the tech companies despite tax cuts. The corporate sector’s contribution to employment did not increase significantly.
Tax burden:
- Corporate tax cuts have also led to a shift in tax burden from corporates to individuals.
- Income taxes increased to 30.91%, and GST rose to 27.65%.
Learning from the study and way ahead:
- Corporate tax cuts would have low impact on private investment as economies are still recovering from the pandemic and facing supply chain disruptions.
- Increased investment can not be expected from the corporate tax cuts when there is uncertainty in businesses about future profits.
- Moreover, tax cuts on profits have not seen immediate impacts in the income distribution.
- Tax cuts disproportionately benefit private capital the benefits for wage earners are dismal.
- There is a need for a more effective policy approach which would require maintaining high taxes on existing profits and offering greater incentives for future investment.
Union budget 2024-25 provision for corporate taxes
Tax rate for nonresident corporations
●The corporate tax rate for nonresident corporations has been reduced from 40% to 35%.
Tax rate for domestic corporations
●The corporate tax rate for domestic corporations is 25%.
●However, a surcharge of 7% is levied on companies with a net income between Rs. 1 crore and Rs. 10 crore, and a surcharge of 12% on companies with a net income above Rs. 10 crore.
Angel tax
●The angel tax, which was applicable to funds raised by Indian companies from investors, is proposed to be abolished on April 1, 2025.
E-Commerce Equalization Levy
●The 2% E-Commerce Equalization Levy (EL) on e-commerce supply or services is proposed to be abolished.
Budget further simplified the direct tax regime for charities, TDS rate structure and capital gains taxation. The two tax exemption regimes for charities will be merged into one.
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Important articles for reference:
https://www.iasgyan.in/daily-current-affairs/rbi-tightens-norms-for-lenders-investing-in-aifs
Sources:
https://epaper.thehindu.com/ccidist-ws/th/th_international/issues/98076/OPS/GCND9L4AQ.1.png?cropFromPage=true
https://cleartax.in/s/corporate-tax
https://www.pib.gov.in/PressReleasePage.aspx?PRID=2035618#:~:text=Further%2C%20corporate%20tax%20rate%20on,will%20be%20merged%20into%20one.
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PRACTICE QUESTION
Q) Corporate income tax is an important source of government’s revenue, however higher corporate tax will result in crowding out effects of companies from India. How should India navigate such a scenario? Critically Examine. ( 250 words)
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