Effective tax rates applicable to Indian firms still among the highest

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The recent cut in the corporation tax rates may ease the burden on corporates. But more steps are required for making the country globally competitive from the perspective of corporation tax.


Effective tax rates applicable to companies in India are still among the highest if one includes taxation on dividends and other means of returning surplus cash to promoters and shareholders. Taking into account taxes on dividend and share buyback, the total tax on corporate profits works out to be 46.8 per cent for the existing manufacturing companies, and 41.1 per cent for new manufacturing units not availing any other incentives and tax breaks.


Among major economies, India is followed by France with a statutory corporation tax rate of 34.4 per cent and Brazil at 34 per cent, shows an analysis of the figures sourced from the Paris-based Organisation for Economic Co-operation & Development (OECD).

The OECD database “provides internationally comparable statistics and analysis from around 100 countries worldwide”, according to its website. India had a tax rate of 48.3 per cent before the latest cut, the highest among the 94 jurisdictions in the database. The 2019 numbers have not been updated. But a comparison with the previous year’s numbers shows that India may not be entirely tax-competitive just yet.

The tax outflow for India after the recent cuts was calculated with the help of tax consultancy EY India. According to the calculation, if a company in India earns a profit before tax of Rs 100, only Rs 53.2 accrues to the owners or shareholders of the firm, assuming that the firm distributes its entire post-tax profits to them.


“In case all the profits of the business are repatriated to its owners, the effective tax outgo, including those on repatriation of funds to the promoters, includes a corporate tax of 25.17 per cent, an effective dividend distribution tax of 20.56 per cent (effectively 12.76 per cent on base profit), and an additional levy of 14.25 per cent (effectively 8.84 per cent on the base profit),” said Surabhi Marwah, tax partner at EY India.


Post the latest cut in the base tax rate, a company with annual pre-tax profits of Rs 100 now pays Rs 25.17 as corporation income tax, plus an additional Rs 12.8 as dividend distribution tax (DDT), if post-tax profits are distributed among its owners. The owners, in turn, pay Rs 8.8 as their tax liability on the dividend income received from the company. This translates into a combined tax liability of Rs 46.8 on a profit before tax worth Rs 100.


For new manufacturing companies, the headline corporate tax, including cess, is now Rs 17.16 per cent, but the additional tax on dividend takes effective tax rate to 41.1 per cent.


Earlier, companies could escape tax on dividend by opting for share buyback to return surplus cash to their shareholders. That route is now closed due to the imposition of 20 per cent tax on share buyback, accounced in this year’s Budget.


“Considering tax on dividend, the combined tax on profits in India is still on the higher side when compared to China and Southeast Asian countries. As companies pay dividend distribution tax, foreign companies with subsidiaries in India don not get tax credit in their home country, making India a high-tax regime for global multinationals,” says Vikas Vasal, partner & leader Tax Grant Thornton.  The effective tax rate for companies in Vietnam is 20 per cent; several firms are relocating there from China following its trade dispute with the US. Many manufacturers are also setting up shop in Thailand, which also has a 20 per cent tax rate.


A number of developed economies also have lower tax rates. In the UK, it is 19 per cent. Emerging market peers like Brazil (34 per cent), Russia (20 per cent), and South Africa (28 per cent) appear relatively competitive.


The capacity expansion has been limited in India, even as it reportedly picked up in places like Vietnam following trade tensions. New projects fell to Rs 0.43 trillion in the June quarter given the Lok Sabha election. It was 3.45 trillion in the same period last year, according to the data released by project-tracker Centre for Monitoring Indian Economy (CMIE).


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