At 48.3% in 2018, corporate taxes in India among highest in the world

Besides making firms less competitive in the global arena, high taxes also impact corporate investments
Corporate income tax in India is among the highest in the world, with the tax rate growing steadily in recent years.

Of the 94 jurisdictions covered by the Organisation of Economic Cooperation and Development (OECD), India had the highest statutory tax rate of 48.3 per cent in 2018, double the global average tax rate of 24 per cent. The OECD’s calculation of combined corporate income tax includes headline tax, surcharge, cess, dividend distribution tax, and any other additional tax.

The headline tax rate for domestic companies with revenue over Rs 250 crore is 30 per cent; firms with revenue below Rs 250 crore are taxed at 25 per cent; and foreign companies attract a tax rate of 40 per cent. A surcharge of 7 per cent is applicable for domestic companies with taxable income between Rs 1 crore and Rs 10 crore, and 12 per cent for taxable income over Rs 10 crore. For foreign companies, the respective rates for surcharge are 2 per cent and 5 per cent. There is also a 4 per cent health and educational cess. Foreign companies pay a 50 per cent tax on royalty too. Besides, there is a dividend distribution tax of 20.56 per cent.

OECD calculations assume that companies distribute their entire annual profits as equity dividends to shareholders.  

The combined corporate tax rate in India is more than one-and-a-half times that of Japan (29.7 per cent), and over double that of Russia (20 per cent) and the UK (19 per cent). The OECD rates look at the standard rate which is not targeted at a particular industry or income type. The top marginal rate is used if countries have a progressive corporate tax system.

“Corporate taxes in India are on the higher side and the government should try to bring it down to the level now prevalent in competing jurisdictions,” Sudhir Kapadia, national tax leader, EY India, said.

Besides making firms less competitive in the global arena, high taxes also impact corporate investments.

Vipul Jhaveri, managing partner – tax, Deloitte, said: “Reducing corporate tax rates will incentivise companies to start investing in capital expenditure.”

Dhananjay Sinha, head of strategy and chief economist, IDFC Securities, said: “When tax rates are rising, as they have been in India in recent years, taxes eat away a greater part of incremental rise in profits, reducing financial incentive for companies to take risks with new projects.” All this has brought corporate taxes in focus ahead of the Union Budget next week. “It’s time the National Democratic Alliance government fulfils its earlier promise of lowering corporate tax rates in its second term,” said Kapadia. This will leave more money in the hands of companies to fund growth and capex. A tax cut will also boost corporate confidence that could trigger the new investment cycle by India Inc, he added. A cut in tax rates may be difficult at a time when the government has been scrambling for resources. Corporate tax is an important source of revenue in developing countries. It accounts for 15.3 per cent of revenues in Africa, and for the more developed OECD countries, it is only 9 per cent.

“India's fiscal position is already challenged and growth has slowed, despite fiscal impulses over the past six months. In the midst of slowing revenue collection, the quality of government spending has also deteriorated (consumption preferred over capex),” noted Tanvee Gupta Jain and Gautam Chhaochharia of UBS Securities.