Income tax collection exceeds corporation tax for first time in 12 years

Income tax collected during the year amounts to ₹4.69 trillion. It is ₹12,000 crore more than corporate tax revenue from ₹4.57 trillion. Income tax mainly consists of income tax paid by Hindu individuals and undivided families (HUF). Corporation tax is the tax paid by companies on the profits they make.

The question is, why did this happen? An obvious argument would be that companies suffered because of the pandemic and ended up making smaller profits and, therefore, paying less tax. But that’s not entirely true. The after-tax profit of listed companies that published their results for 2020-21 amounted to 2.6% of gross domestic product, the highest since 2014-15 when it was 3.1%. That’s before all the companies have even reported earnings. Profits of listed companies were 1.1% of GDP in 2019-20.

After-tax profit as a percentage of total income of listed companies, or net margin, jumped to 9.1%, the highest since 2007-08 when it was 10.2%. Of course, in addition to listed companies, unlisted companies also pay corporate tax.

In this scenario, it is surprising that corporate tax collections in 2020-21 were lower than income tax collected. In addition, corporate tax collections in 2020-21 were around 17.9% lower than in 2019-20, when they amounted to ₹5.57 trillion. By comparison, income tax collections fell just 2.3% between 2019-20 and 2020-21. They held on to ₹4.80 trillion in 2019-20.

So what’s going on here? In September 2019, the Center reduced the basic corporate tax rate to 22% from the previous 30% and to 15% from the previous 25% for new manufacturing businesses. This was done “to promote growth and investment” and “to attract new investment in manufacturing and thereby boost the Make-in-India initiative”. But that doesn’t appear to have happened, with the investment-to-GDP ratio in 2020-21 falling to 27.1%, its lowest level in two decades. It was 28.8% in 2019-2020. The ratio has fallen significantly since peaking in 2007-2008 at 35.8%. Therefore, we have a peculiar situation where listed companies have made their highest ever profits and corporate tax revenues have declined.

The magnitude of the decline can be gauged by the fact that corporate tax collections in 2020-21 were almost similar to those in 2015-16, when they were at ₹4.53 trillion. We have gone back five years on this front. This shows that income tax rather than corporation tax should have been reduced in September 2019. This would have put more money in the hands of people who would likely have spent it, helping the economy. But the government cut corporate tax instead.

Another possible explanation for the drop in corporate tax receipts could lie in the way listed companies increased their profits last year. They reduced their costs by renegotiating terms with their suppliers and subcontractors. These suppliers and contractors have also renegotiated terms with their suppliers, contractors and employees to stay in business. It is now well documented that small and medium-sized businesses are going through a tough time.

In the process, the profits of these suppliers and sub-contractors have decreased, which has resulted in lower corporate tax collection for the government, since it is not only listed companies that pay taxes.

What emerges from the analysis is that large companies have benefited to the detriment of small and medium-sized companies. This led to a strange situation where income tax collections were higher than corporate tax collected. It should be recalled here that the Bharatiya Janata Party was in favor of the abolition of income tax when it was in opposition.

Vivek Kaul is the author of Bad Money