The new corporate tax regime, launched in 2019, had delivered a massive cut in corporate tax with effective tax rate lowered from the highest rate of 35 per cent to 25 per cent. Companies in the new corporate tax regime, however, had to forego all tax exemptions, incentives or deductions, including MAT credit.
If we take stock of the situation six years later, Indian companies have certainly benefitted from the tax cut. Effective tax rate of all companies has moved down from 29.5 per cent in FY18 to 22.5 per cent by FY24. But the expectations that private capex cycle will take off or job creation will improve have not been met. It can be argued that the demand contraction seen during the pandemic had impeded capital investment or that new capacities are being added in a few sectors such as chemicals, renewables and semiconductors, where demand is good.
Be that as it may, another interesting aspect is that many companies have not yet moved to the new corporate tax regime. Of the total taxable income in 2023-24, around 38 per cent continued to be under the old tax regime, paying tax at the rate of 30 per cent plus surcharge and cess.
This indicates that companies, especially the larger ones, have carried forward tax credits which they are using to reduce their tax liability. The effective tax liability of companies with taxable income exceeding ₹500 crore was just 18.8 per cent, as per latest available data.
With the decline in effective tax rate, corporate tax collections have also been decelerating. The Centre’s move to clamp down on credits given for Minimum Alternate Tax and nudging companies to move to the new tax regime, need to be seen against this background.
Large companies, lower tax
Larger companies, which account for a lion’s share of taxable income, always paid lower tax, thanks to the battery of tax consultants employed by them to advise them on innovative means to reduce tax liability. But the gap between the tax rate of small and big companies appears to have widened of late.
The effective tax rate of companies with profit before tax between 0 to 1 crore was 23.68 per cent in 2023-24. The tax rate moves lower as the size of the company increases with those with profit over ₹500 crore paying tax at the rate of 18.8 per cent only.
Further, the effective tax rate of larger companies has moved down 7.5 percentage points since FY18. The current rate of 18.8 per cent is below the effective tax rate of 22 per cent in the new corporate tax regime. With losses mounting during Covid, companies seem to have accumulated MAT credit which has helped them reduce their tax liability in the years following the pandemic. Other incentives which companies have been using as of FY24 are tax holidays provided to exporters located in Special Economic Zones, accelerated depreciation provided to manufacturing, power generation and transmission businesses, deduction of profits of infrastructure companies and deduction of profits in generation, transmission and distribution of power.
What the Budget did
In an ideal situation, it is good to lower tax incidence of companies so that they can improve their output and contribute to economic growth. But in the face of sluggish private capex and stagnating pay scales of private sector employees, the Centre cannot be faulted for plugging the gap that is allowing larger companies to lower their tax liability inordinately. With the gross tax revenue getting hit due to income tax and GST rationalisation, the Centre appears to be turning its attention towards corporate tax revenue now.
The Union Budget 2026 laid down that the companies in the old regime will no longer be allowed to use credit brought forward for MAT, to bring down their corporate tax liability. Such set off was being allowed only for companies in the new tax regime, and that too only partially. The rate of MAT was lowered from 15 to 14 per cent.
MAT was introduced in 1987 to check companies from claiming various deductions and exemptions to avoid paying tax. Therefore, if the tax liability of a company was lower than 15 per cent of its book profit, the company was required to pay MAT at the rate of 15 per cent to the exchequer.
However, companies were given a leeway that when the company paid MAT, the difference between tax liability and MAT paid could be carried forward for 15 years and used to reduce tax liability in future.
The Centre has now done away with the practice of allowing the excess tax paid under MAT to be carried forward. Any MAT credit brought forward from earlier years can be set off only up to 25 per cent of the tax liability for the year, and only in the new tax regime.
Collections slowing
The move to restrict MAT credit and nudge companies to move to the new tax regime appears to be a result of slowing corporate tax collections in recent times.
While the compounded annual growth in income tax collections was 15 per cent between FY18 and FY27 (BE), the growth in corporate tax is a much lower 8.9 per cent. In FY18, corporate tax yielded ₹5.7 lakh crore, amounting to 58 per cent of direct tax collections. But by FY27 (BE), corporate tax is expected to raise ₹12.3 lakh crore, accounting for only 46 per cent of total direct tax collections
The slowing corporate tax collections are not due to decline in profitability, since profit growth of companies has picked up since FY24 with net profit growing in high double digits in many years. With companies becoming increasingly reluctant to pay tax, it will not be surprising if the Centre now turns its attention towards more measures to improve corporate tax collections.
Source from: https://www.thehindubusinessline.com/opinion/red-flags-in-corporate-tax-revenue/article70704415.ece
