Impact of Corporate Tax Cuts on India’s Economy and Corporate Savings

Impact of Corporate Tax Cuts on India’s Economy and Corporate Savings

Sub : Eco

Sec: Fiscal Policy

• Introduction of Corporate Tax Cuts (2019)
• Pre-2019 Tax Regime:
  • 25% tax rate for companies with annual turnover up to ₹400 crore.
  • 30% tax rate for others.
• 2019 Tax Cut:
  • New tax regime reduced corporate tax to 22% for companies opting to forgo specific deductions.
  • Lower tax rates introduced for new manufacturing companies with certain conditions.
  • Estimated Tax Savings by Corporates
• Tax Savings Since 2019:
  • India’s largest corporates may have saved over ₹3 lakh crore in taxes since the introduction of the concessional tax regime in 2019.
• Revenue Foregone from Deductions:
  • Over the last decade (FY13 to FY22), ₹8.22 lakh crore in revenue was foregone through various corporate tax deductions.
  • Decline in Corporate Tax Rates
• Effective Tax Rate Before 2019:
  • 30% or higher average effective tax rate for corporates on profits.
• Post-2019 Tax Cut:
  • Effective tax rate fell to 21.2% by FY24.
  • Large companies, including the top 10% of the BSE 500, benefited.
  • Corporate Profits vs Taxes Paid (FY20–FY24)
• Corporate Profits Growth:
  • Corporate profits grew at a significant rate of 32.5% between FY20 and FY24.
• Taxes Paid Growth:
  • Despite the growth in profits, the taxes paid by corporates grew by only 18.6% during the same period.

Corporate Tax

Corporate Tax is a direct tax levied on the profits of companies and corporations, both private and public, under the Companies Act.

The tax is calculated on the net income of the company after deducting business expenses, operating costs, and depreciation.

Corporate Tax Cuts in India (2019 Tax Reforms):

• In 2019, India reduced corporate tax rates:
  • For existing companies: From 30% to 22%.
  • For new companies: From 25% to 15%.

Revenue Forgone:

Revenue forgone refers to the income or tax revenue that a government “forgoes” or loses due to exemptions, deductions, or other tax benefits provided to businesses, individuals, or other entities. This term is often used in the context of fiscal policy to describe the impact of tax incentives or relief measures, which reduce the tax base and government revenue collection.

In simpler terms, it represents the revenue the government could have collected but has decided to forgo in order to encourage specific behaviours such as investment, production, or consumption.