India’s economy needs moderate corporate taxes to prosper

India’s economy needs moderate corporate taxes to prosper

In fiscal year 2022-23, India’s Income Tax Department data shows that the gross total income (GTI), before loss set-offs and deductions, of individuals amounted to 62.4 trillion, while that of corporates amounted to 38.3 trillion. 

Of the country’s overall GTI of 107.2 trillion, as per the department’s records, the balance 6.5 trillion is accounted for by groups that include Hindu undivided families (HUFs), firms, associations of persons (AOPs) and bodies of individuals (BOI).

While individuals accounted for 58.2% of overall GTI in 2022-23 (or 21.1% of gross domestic product), corporates contributed 35.7% (13% of GDP). However, the aggregate tax paid by corporates in that fiscal year is higher— 7.2 trillion versus 6.8 trillion for individuals.

As a proportion of their income, corporates paid 18.7% of their GTI in taxes that year, compared to 10.9% of GTI paid by individuals. This data clearly shows corporates are paying higher rates and a higher quantum of taxes than individuals in India.

While reporting aggregate tax figures in the media, individual income taxes are often clubbed with groups like AOPs, BOIs, HUFs, etc. The clubbed numbers give the impression that individuals are paying more taxes than corporates, while the disaggregated data provides a clearer picture.

Now consider the year earlier. In fiscal 2021-22, individuals earned a GTI of 54.3 trillion, which was 19.9% of GDP, and shelled out aggregate tax of 5.7 trillion. 

In comparison, corporates earned a total of 33.7 trillion, 12.4% of GDP, with an aggregate tax figure of 6.3 trillion. So corporates together paid 18.6% of their GTI in taxes, whereas individuals paid 10.5% of their added-up income.

As is to be expected, general direct tax collections have risen from year to year, though the ratios outlined above have not changed much from 2020-21 to 2022-23.

In 2020-21 as well, the scenario was similar, a year in which Income Tax Department numbers show that individuals earned a total of 45.1 trillion, 19.2% of GDP, while paying aggregate taxes of 4.3 trillion. 

Corporates earned a total of 25.3 trillion, or 10.8% of GDP, with their taxes adding up to 4.6 trillion. So corporates paid, on average, 18.2% of their GTI in taxes, whereas individuals paid 9.4%.

In terms of what share of earnings have been paid, individuals have seen this proportion go up from 9.4% of their GTI in 2020-21 to 10.9% in 2022-23. Companies saw it rise from 18.2% of their total earnings in 2020-21 to 18.7% in 2022-23. In other words, corporates have been paying a much higher rate all these years.

It is interesting to note that the country’s overall GTI in the department’s database has increased from 74.4 trillion in 2020-21 to 107.2 trillion in 2022-23, at a compounded annual growth rate (CAGR) of 20%, rising from 31.7% of GDP to 36.3%. 

Aggregate tax has also increased from 9.7 trillion to 15.3 trillion in the same period—from 4.1% of GDP to 5.2%. Taxes have grown at a significant CAGR of 25.8%, reflecting rising taxable income and better tax compliance, both of which augur well for India’s economic outlook.

Between 2020-21 and 2022-23, individual GTI has increased by a CAGR of 17.6% CAGR (from 45.1 trillion to 62.4 trillion), while corporate GTI has increased by a CAGR of 23% (from 25.3 trillion to 38.3 trillion). Individual taxes grew by CAGR of 26%, while corporate taxes grew by 24.8%. 

A contributory factor has been a change in how corporate dividends are taxed. Since 2020-21, dividend income has been taxed in the hands of individuals (at their slab rate), whereas earlier this tax burden was placed on dividend distributing corporates. 

Collections from this are estimated at around 40,000 crore annually. Before 2020-21, this number showed up as part of corporate tax collections. Now it is logged as taxes paid by shareholders.

As a proportion of India’s GDP, the share of taxes on corporates was 2.4% in 2023-24, 2.3% in 2022-23 and 1.96% in 2021-22. In comparison, the share of individual income tax was 2.3% of GDP in 2023-24, 2.1% in 2022-23 and 1.8% in 2021-22.

In the United States, the share of corporate taxes in GDP was 1.77% in 2021, 1.84% in 2022, 1.66% in 2023 and is estimated to be 1.81% in 2024. However, share of individual income tax in GDP in the US was 9.72% in 2021, 10.95% in 2022, 9.17% in 2023, and is projected at 9.43% in 2024. 

Individual tax collections are much higher in the US than the corporate tax mop-up, which clearly shows that as economies develop and people prosper, individuals contribute more by way of taxes to the national coffers than corporates do.

Corporates are entities that accumulate investments from thousands of individuals and direct the money in ways that create multifold value. The value created by corporates is then distributed to individuals in several ways, one of the most significant being employee salaries, which then form the base for income tax collections. 

Dividends are shared largely with individuals ,which are again taxed. Globally competitive tax rates for corporates is the right strategy for India to increase investments and employment, both of which contribute to economic growth.

 

T.V. Mohandas Pai & Nisha Holla are, respectively, chairman and research fellow at 3one4 Capital.

#Indias #economy #moderate #corporate #taxes #prosper

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