CORPORATE TAX DISPARITIES IN INDIA: CAUSES AND IMPLICATIONS FOR TAX POLICY BY: SHIVAM GUPTA
CORPORATE
TAX DISPARITIES IN INDIA: CAUSES AND IMPLICATIONS FOR TAX POLICY
AUTHORED BY: SHIVAM GUPTA
Institution: Christ Deemed to be University, Pune
Lavasa Campus.
Abstract
The objective of this article is to
investigate corporate tax disparities in India and the likely causes. The
objectives were met by investigating the country's current
tax structure, problems with corporate taxation, and the causes of these
problems. The author also consider how we may handle some of these
issues in relation to other growing economies. Emerging economies are vital to
the global economy. India is clearly growing in importance, not just among
emerging economies but also in the global economy. The tax environment in India
is frequently viewed as a complex system, with a plethora of indirect taxes,
burdensome litigation, and a lack of predictability. Tax policy can be an
efficient instrument for promoting both international and domestic investments,
which India desperately needs. The country's current huge fiscal deficit
necessitates making revenue growth a main issue of Indian tax policy. Although
indirect taxes have been an important source of development funding in
developing nations due to their broad coverage, we believe that corporation
taxation has the potential to become a future source of revenue.
Keywords: Corporate Tax, Economy, Income,
Taxation. Policy.
I.
Introduction
Emerging economies are vital to the
global economy. India is clearly becoming a significant and vital country, not
only among emerging countries but also the global economy. Tax regimes around
the world are facing major problems in the face of global economic instability.
Countries are being compelled to decrease tax rates in order to attract and
increase investment. Many countries around the world will rely on tax policy to
keep up with the various stages of liberalisation and globalisation. With the
publication of the Direct Tax Code (DTC), India is on the verge of massive
corporate reforms.
Unprecedented fiscal and economic
imbalances plague the current global economic climate. The flow of finance from
wealthy countries that allows poor countries to access international resources
has been significantly hampered. As a result, countries that grown
accustomed to such resources require immediate answers to mobilise domestic
resources in order to compensate for the interruption in their funding
paradigm. There are many medications available for them. Some are advised to
cover tax cuts by spending cuts. Others advocate maintaining government spending
while raising tax rates or imposing new taxes to balance the budgets.
Prime Minister Narendra Modi stated
in October 2020 that he believes India will be a USD 5 trillion economy by
2024. India's GDP in 2020 is expected to be USD 2.66 trillion. Despite a 7.3%
drop in GDP from 2019 due mostly to the pandemic, the economy has showed
amazing resiliency and GDP growth has picked up pace during the previous year
and a half. However, the goal of a USD 5 trillion economy remains a long way
off. Clearly, continued and sustained high growth would be required, not only
to reach the USD 5 trillion-dollar goal within a few years, but also to recover
from the COVID-19-induced disruption and achieve the United Nations (UN)
agenda's Sustainable Development Goals (SDGs) for emerging and developing
economies. Because such expansion would necessitate significant government
spending, consistent growth in tax revenues would also be required.
As we have seen during the previous
two years, the implementation of fiscal consolidation measures in various
nations has been hampered by seemingly overwhelming political and social
obstacles. Whether it is a tax rise or a decrease in spending, any attempt to
implement a solution that fails to adequately account for particular local factors
is likely to cause delays and aggravate societal polarisation. In rare
situations, the cure may be worse than the disease. For example, successful
execution of domestic cuts could be made a prerequisite for receiving critical
external financial aid. However, such policies are likely to cause a deeper
economic recession, jeopardising social stability and economic revitalization
in the short run.
II.
Hypothesis.
Corporate tax disparities in India
are because of a complex tax structure, troubles with company taxation, and a
lack of predictability in the tax environment. These problems can be addressed
through simplifying the tax structure, improving the efficiency of tax
administration, and making the tax environment more predictable.
III.
India’s Corporate
Tax Structure.
India is the seventh largest country
in South Asia and the world's tenth largest in terms of nominal GDP.
Market-based reforms began in 1991, when the country was obliged to liberalise
its economy due to a severe balance of payment difficulty. Tax reforms began in
the mid-1980s and became more aggressive in the 1990s. India is a
multi-religious country, maybe the only place in the universe where different
religions, cultures, and customs coexist to make the economy operate.
Annual growth reached 6.2 percent in
2011-2012 before falling to 5% in 2012-2013. Poverty and corruption are common
in the country, and they remain on the agendas and manifestos of political
parties even now. Tax evasion by Indian taxpayers has climbed from Rs 1,717.17
crores in 2001-2002 to Rs 5,041.71 crores in 2003-2004.[1]
Public finance is critical to India's economy
as well as its residents' well-being. The Indian tax system is broad and
well-structured, with a three-tier federal structure consisting of the union
government, state governments, and urban/rural municipal corporations.
According to the provisions of the Indian Constitution, the ability to impose
taxes and duties is divided between the central and state governments. Direct
taxes like as income tax (personal and corporate), wealth tax, and customs
duty, excise duty, stamp duty, central sales tax, and service tax are levied by
the central government.
State governments levy state
value-added tax, profession tax, stamp duty, and other taxes. Local governments
levy taxes such as octroi, property tax, road tax, and so on. In India, tax
policy was directed by a wide number of demands placed on the government to
boost growth and achieve equitable income distribution, as well as the role
that history and institutions had in developing India's tax system.
The country's tax structure is divided into
two categories:
·
Direct Tax;
·
Indirect Tax.
Direct taxes have accounted for more
than half of total gross tax revenue since 2007-2008, and direct tax revenue
has climbed tenfold in the last 14 years, from $8.62 billion in 1996-1997 to
$87 billion in 2010-2011.[2]
The composition of the tax revenue in India has shifted dramatically in favour
of direct taxes, which currently account for approximately 60% of total tax
receipts. Corporation tax (sometimes known as super tax) is a direct tax
applied on a company's total taxable income. The constitution of India empowers
the union government to levy corporation tax. Under the provisions of the
Income Tax Act of 1961, firms and commercial organisations in India are taxed
on the income from their worldwide dealings. A company is considered to be a
resident of India if it was incorporated in India or if its control and
management are fully located in India.
Corporate income tax, according to
public finance experts, is an important and necessary tax that complements
personal income tax and contributes to the complete realisation of local and
international tax policy objectives. Corporation tax is charged at a single
rate for each kind of corporate entity but is subject to a number of rebates
and exemptions that vary according on the activities, criteria/type of
corporate incomes, profits, and investments.
Corporate tax rates are 30% for
domestic companies and 40% for international companies.
·
Tax reforms
over the years
The Central Government has
implemented a number of far-reaching tax adjustments in recent years. On the
direct tax front, some significant initiatives were taken, including:
1. Corporation tax structure
rationalisation, including dividend taxation.
2. The expanding and depth of the tax
base through the elimination of different profit-related income tax deductions
and the imposition of new levies to tackle the difficulties of e-commerce and
highly digitalized business models.
3. The execution of the G20/OECD Base
Erosion and Profit Shifting project guidelines, as well as the amendment of
India's tax treaties by ratification of the multilateral instrument.
Measures to modernise tax
administration have also been implemented, including:
1) Utilising
information and modern technology to facilitate filing
2) Faster
return processing
3) Data
analytics and impersonal evaluations.
IV.
Rationale
for the ‘Tax Gap’.
1.
Informal Sector: One of the primary causes of this 'tax gap' is the comparatively lower
level of compliance among persons working in the informal sector of the
economy. According to research undertaken by the International Monetary Fund
(IMF),[3]
the informal sector, while diminishing, nonetheless accounts for up to
one-third of economic activity in low- and middle-income nations. According to
the report, this sector accounts for approximately 30% of the economy (in terms
of GDP) in South Asia and approximately 28% in emerging market economies from
2010 to 2017.
Because of
non-registration under any law, the informal sector stays primarily outside the
tax system. It is extremely difficult to monitor compliance in this sector
because it primarily consists of self-employed individuals and small firms.
While withholding tax rules are important in sustaining and preventing loss of
the tax base, bringing the informal sector into the formal/organized sector is
critical to broadening this base. While presumptive taxation of small
enterprises has resulted in a high number of returns being filed, a large
proportion of such forms state income that is not taxed.
2.
Revenue Loss:
Another source of concern is revenue leakage, particularly in the micro, small,
and medium-sized enterprise (MSME) sector, as a result of the blurring of the
distinction between personal and business expenses, which leads to claims of
excess deductions, as well as the tendency to exploit the continued prevalence
of cash transactions by falsely claiming tax-deductible payments where the
money is returned in cash. These leakages are usually uncontrolled due to
inefficient administrative verification processes.
The issue of revenue
leakage is not limited to direct taxes, but also affects indirect taxes. According
to official data, the government uncovered fraud totalling INR 408,530 million
in FY 2019-20 alone, of which only INR 184,640 million could be recovered.[4]
Similarly, under-pricing
of goods is a prevalent practise at customs, which reduces revenues and causes
economic distortion and governance difficulties. Misdeclaration through
incorrect classification of products, as well as improper use of exemptions,
deprive the government of its rightful share of customs charges.
To detect such fraudulent
acts, the risk-management system must be reinforced and fine-tuned.
GST fraud is typically
associated with fraudulent invoicing, in which taxpayers claim input tax credit
to lower outward liabilities or claim refunds. Furthermore, fraudulent invoices
are frequently used not only to cheat GST, but also to overstate turnover for
bank loans, book fake invoices to avoid income tax, and even reroute cash. In
recent years, the GST authorities have taken concerted action to combat the
plague of tax evasion by utilising data analytics and risk profiling. However,
tax administrations in different states have varying degrees of ability. Many
states will struggle to successfully repair income deficits without increased
capacity building and streamlining of activities such as scrutiny, audit, and
inquiry.
3.
Benefits and Concessions: While a number of old tax benefits have been phased down over
time, an abundance of new breaks and exemptions have been added in an
unorganised manner. The total estimated tax revenue foregone for FY
2020-21 due to various deductions, rebates, and special exemptions is INR
1,032,850 million for corporate taxpayers, INR 88,270 million for non-corporate
taxpayers (firm/association of persons/body of individuals), and INR 1,705,830
million for individual/ Hindu undivided family, according to the Statement of
Revenue Impact of Tax Incentives published as part of the Budget Receipts
2022-23. [5]
Similarly, the overall
revenue impact of tax concessions (exemptions as well as export promotion
schemes) on account of basic customs duty for the fiscal year 2020-21 is INR
2,348,130 million. On
the other hand, such tax expenditure could be viewed as targeted spending for
the growth of specific sectors or as an incentive for certain social and
economic activities. It must also be accepted that, given the scarcity of
suitable infrastructure and other resources in developing nations, the
application of tax incentives is a fundamental component of the right to
development in these countries. However, the long-term viability of these
incentives, particularly those that have been in place for some time, must be
considered.
V.
Hindrances
in Indian Corporate Tax Law.
Because corporate tax is a
high-yielding tax, the government can utilise it to raise funds for development
and other purposes. Corporate India is increasingly concerned about the lack of
stability and the revenue authorities' stance on a variety of topics. The fact
that it takes a long time to obtain a settlement in litigation is cause for
concern. The country's present tax structure is riddled with complications as a
result of annual modifications. Corporate taxes in India are also determined by
the tax regime. Tax competitiveness under various tax regimes results in
business tax policies that are efficient from the standpoint of the economy as
a whole.
Gaps and overlaps in taxation can
occur to the extent that the tax system incorporates taxable income definitions
and administrative practises, particularly permissible deductions that are
mutually compatible. In India, the tax gap (the difference between possible
revenue and actual collection) remains considerable. This is a major source of
concern. In 2005-2006, there were 9,534 income tax cases outstanding in the
country, totalling Rs 17,001.08 crores.[6]
Refunds against advance tax
collection must also be settled as soon as possible. We require simpler
regulations that can be simply implemented. When it comes to taxes, India is
regarded as the most tough country. The tax authorities have failed to erase a number
of tax misrepresentations.
VI.
Corporate
Tax framework in Emerging countries.
Because different research has used
the phrase in different circumstances, we need to define the term
emerging economy. What we need to realise is that the meaning and definition
of words vary as countries advance and enter different stages of development. A
developing economy primarily meets two conditions: rapid economic expansion and
government policies that encourage economic liberalisation and the adoption of
a free market. Emerging economies are low-income, fast-growing countries that
rely on economic liberalisation as their principal source of growth.
The majority of emerging market
countries are in Asia, Latin America, Africa, and the Middle East. These
countries have unique characteristics such as shifting GDP, distinct business
cycle stages, less developed markets, and less sophisticated enforcement
organisations and legal infrastructure, to name a few.
Emerging economies prioritise
attracting foreign money, creating job opportunities, export promotion, and
balanced regional growth. Because private initiative and money are restricted
in developing or emerging economies, the government must play an active role in
encouraging economic progress. Fiscal policy, or the budget, has become
increasingly crucial in encouraging growth and development in these economies.
In South Asia, the average tax-to-GDP
ratio was 9.74 percent in 2010, while in 18 Latin American nations, the average
tax revenue-to-GDP ratio increased from 18.9 percent in 2009 to 20.7 percent in
2012. In 2010, the average tax-to-GDP ratio in OECD countries was 33.8%.
VII.
Analysis
and Discussions.
1.
Corporate Tax rates: Among wealthy countries, the United States and France have high
corporate tax rates of 35 and 33.33 percent, respectively, followed by New
Zealand at 28 percent and the United Kingdom at 23 percent, while Canada and
Germany are each at 15%.
Argentina has the highest
corporate tax rate in Latin America, at 35%, while Paraguay has the lowest, at
10%, followed by Brazil at 15%. The corporate tax rate in the remaining 13
countries remains in the 25-30% range.
In most African
countries, the rates range between 20% and 30%. Japan came in second with
25.5%. Tax uncertainty exists because the rates are not stable. A comparison of
corporate tax rates with those of other nations reveals that our corporate tax
rates are moderate, and the direct tax code is likely to result in a drop in
corporate tax rates, coinciding with the international trend of lowering tax rates.
2.
Tax-GDP: Tax-GDP
is defined as the total tax collected by the government divided by the GDP of
the country. The level of taxation in a country is traditionally measured by
the ratio of taxes to some measure of national revenue, known as the tax-GDP
ratio.
The tax-GDP ratio is
significant to study since taxation developments in a country are evaluated
primarily in terms of this ratio and the composition of tax income. India has
one of the lowest tax-to-GDP ratios, at 15.5%, compared to 17.7% for middle-income
countries. The percentage of direct taxes to total taxes in India is 37.7%,
while it is 57.5 percent in South Africa, 55.85 percent in Indonesia, 41.3
percent in Russia, and 75.8 percent in the United States, while the average for
Organisation for Economic Cooperation and Development (OECD) countries is 34.6
percent.[7] As
a result, India must improve its tax-to-GDP ratio. It is preferable to attain a
greater tax-to-GDP ratio by widening the tax base rather than dramatically
increasing marginal tax rates. Higher tax rates create more incentives to
engage in taxable activity, which promotes tax evasion.
3.
Tax-incentives: Taxation is utilised as a tool to collect revenue for the government's
development operations. Many emerging economies give tax breaks to attract
foreign investment by granting a short time of tax exemption and reduction for
tax investors; tax breaks have been shown to effect non-compliance.
To boost the tax-to-GDP
ratio, almost all growing countries offer tax breaks and lower tax rates which
is known as Tax-incentives.
VIII.
Conclusion
India is rising as an important and
necessary country in the world economy; let alone emerging countries, the
country's tax policy should be consistent with the global tax code. The tax
environment in India is frequently viewed as a complex system, with a plethora
of indirect taxes, burdensome litigation, and a lack of predictability. Tax
policy can be an efficient instrument for promoting both international and
domestic investments, which India desperately needs. The country's current huge
fiscal deficit necessitates making revenue growth a main issue of Indian tax
policy.
Although indirect taxes have been an
important source of development funding in developing nations due to their
broad coverage, we believe that corporation taxation has the potential to
become a future source of revenue. There is no shortage of tax reform
legislation in the country. What is lacking is the political resolve to impose
tough measures to accelerate administrative changes and revenue collection in
the country. The need of the hour, therefore, is not to change the tax system,
but to improve tax administration and compliance.
[1] India Stat,
http://www.indiastat.com (last visited May 23, 2023)
[2] The Navhind Times (2011), “DTC to
come into force from April 2012”, The Navhind Times, 9 December.
[3] International Monetary Fund,
https://www.imf.org/Publications/fandd/issues/2020/12/what-is-the-informal-economy-basics
(Last Visited May 23, 2023).
[4] GST officers detect Rs 7,421 crore
tax evasion in April-June; recover Rs 1,920 crore, The Economic Times, (May 23,
2023, 05:56 PM), https://economictimes.indiatimes.com/news/economy/finance/gst-officers-detect-rs-7421-crore-tax-evasion-in-april-june-recover-rs-1920-crore/articleshow/85004716.cms?from=mdr.
[5] Revenue foregone to corporates
estimated at Rs 99,842.06 cr in 2019-20, The Economic Times, (May 22, 2023,
02:55 PM), https://m.economictimes.com/markets/stocks/news/revenue-foregone-to-corporates-estimated-at-rs-99842-06-cr-in-2019-20/articleshow/80634746.cms.
[6] Comptroller & Auditor General
of India’s Performance Report, Government of India (2005/2006).
[7] Business Standard (2013), “India’s
tax-GDP ratio one of the lowest”, Business Standard, 26 March.