The complexity and importance of corporate tax policies in India play a crucial role in shaping the nation’s economic landscape. This article focuses on and examines the disparities in the corporate tax regime, exploring their causes, implications, and necessary policy interventions. The article highlights the significance of corporate tax within India’s broader tax system, noting the impact of sector-specific incentives, regional tax disparities, complex compliance requirements, tax avoidance practices, policy fluctuations, and administrative inefficiencies on creating an uneven playing field for businesses. The evolution of India’s tax policies since the 1990s reveals significant fluctuations in tax revenue and economic imbalances, underscoring the need for a more consistent and equitable approach.
Key factors contributing to tax disparities include preferential treatment for certain industries, aggressive tax planning by larger corporations, and varying regional tax policies that lead to resource misallocation and economic inequalities. Additionally, frequent changes in tax policies create uncertainty, complicating long-term business planning. The analysis also points to administrative inefficiencies and corruption as significant contributors to these disparities. Addressing these issues requires comprehensive tax reforms aimed at standardizing incentives across sectors, harmonizing regional policies, simplifying compliance, and implementing robust anti-avoidance measures. Ensuring policy stability, enhancing administrative efficiency, conducting regular impact assessments, and promoting public awareness and engagement are essential steps toward creating a fairer and more efficient tax system.
Introduction
The hardest thing to understand in the World is Income Tax.
– Albert Einstein
Taxing policies and regulations are vital in shaping an economy of the nation. It has been a crucial element in determining the best outcome of the nation’s fiscal capacity and scarcity as well. Generally, taxing policies seem to be more precise but would be confusing to layman’s understanding. Taxes comprising both direct and indirect; Income tax has been the primary tax under the direct taxes collected by the nation that is well known to every individual in our country.
Similar to the individuals, companies and corporates are also recognised as a separate legal entity and a legal person under the law and so, a tax is collected, also from the corporations from their profits and gains earned annually which is their obligation to pay as Income Tax called the Corporate Income Tax or Corporate Tax. As per the Income Tax Act, 1961, it is clearly distinguished that the corporations can be either domestic company or a foreign companies. Such corporate tax is calculated by deducting the expenses, from the profits earned, by the company such as cost of goods sold (CGS), R&D expenses, marketing costs and depreciation and other expenses made by the company. Our Indian Constitution defines under Article 366(6) that what is corporation tax.
Tax Fluctuations and Tax Disparities
In recent times the evolution of taxation and laws on taxation in India has been significantly noted because of its unusual fluctuations and imbalances observed through the official data. Beginning of the Tax regime in the 1990s started with a view of reducing the complex deductions and simplified tax regimes and the tax system was then overhauled by the optional over-rates resulting subsequently in the state of zero-taxzero tax companies. There arose a situation to introduce a minimum alternate tax (MAT) and lower effective tax rates for even larger companies. This provided a simpler tax regime with lower rates but with only a few deductions. The lower tax imposed on the corporations led to the fluctuations in the central government’s net tax revenue between the period of 1994-95 to 1997-98.
From 1991-92 to 1993-94, the center’s net tax revenue experienced an increase, followed by gradual fluctuations that led to a decrease in the subsequent years. However, from 1998-99 to 2000-01, there was a rise in the revenue ratio. However, significantly on the whole, there was a total rise in the percentage from 19% in the year of 1980’s to 33% in the year of 2000. This made a rise also in the GDP at Factor cost from 1.05 per centpercent in the year of 1981 to 1.52 percent in the year of 1998. Having much impact on the growth of the country’s central revenue, the corporate tax had a significant role to play in the entire central revenue tax system.
Significance of Corporate Tax
Corporate tax has been the essential part of the entire tax system in any country. The corporate tax has been very important in the India’s Tax System as well from the very beginning. Our government made several legislative changes to the tax system, specifically targeting corporate tax, in response to increasing instances of tax evasion and avoidance by companies over time. The primary objective of these amendments was to boost revenue, with a focus on leveraging the growing corporate sector to achieve this goal. It provides the government with money needed for public services, infrastructure, and social programs.
By taxing businesses’ profits, the government ensures that companies contribute their fair share to the economy. Competitive tax rates can attract foreign businesses to invest in India, boosting economic growth. The structure of corporate tax directly influences business decisions, including investments and expansions. Overall, corporate tax helps the government fund important projects, supports economic development, and ensures businesses contribute to national progress.
Causes of Corporate Tax Disparity
Basically, Disparities in the corporate tax regime in India arise from a combination of sector-specific incentives, tax evasion and avoidance, regional policies, complex compliance requirements, policy volatility, and administrative inefficiencies. Addressing these issues is crucial for creating a more equitable and efficient tax system. Disparities in the corporate tax regime in India stem from several factors, creating an uneven playing field for businesses across different sectors and regions.
- Sector-specific incentives and exemptions lead to disparities. Industries, such as IT, manufacturing, and agriculture, receive various tax breaks and incentives, which are not uniformly available across all sectors. This results in some businesses paying significantly lower effective tax rates than others leading to destruction of flow of tax payments.
- Tax evasion and avoidance practices further exacerbate disparities. Some corporations employ sophisticated strategies and tactics to minimize their tax liabilities, often through loopholes with a clever and aggressive tax planning. This not only leads to revenue losses for the government but also places an unfair burden on compliant businesses which are small in comparison to those.
- Complex and varying compliance requirements also been a crucial element. The complexity of the tax system, with its baffled rules and regulations, can lead to inconsistent enforcement and interpretation by tax authorities. Larger corporations often have the resources to navigate these complexities more effectively, securing better tax outcomes compared to smaller businesses. On the other hand, larger companies always look to pay lower tax revenues than the smaller ones causing major fluctuational changes.
- Regional tax policies contribute to the differences in the corporate tax regimes. States in India have the autonomy to offer additional incentives to attract businesses. Consequently, states with more favourable tax policies can attract more investment, while others lag, creating regional economic imbalances causing a disparity.
- Frequently changing tax policies and rates add to the inconsistency. As already mentioned, the Indian tax regime has undergone numerous changes till the recent years, creating uncertainty and making long-term planning difficult for businesses. This volatility can benefit some businesses that can quickly adapt, while others struggle to keep up with the complex nature of our Indian taxation system.
- Administrative inefficiencies and corruption can also cause the effective tax rates paid by different businesses. Inconsistent application of tax laws and corruption within the tax administration can lead to preferential treatment for certain companies.
Corporate Tax Policy Implications
Addressing these disparities in corporate tax through comprehensive policies is crucial for fostering a more equitable and efficient economic environment. Standardizing tax incentives across all sectors prevents resource misallocation and promotes a level playing field, while harmonizing regional tax policies with national standards can reduce economic imbalances. Simplifying tax compliance helps smaller businesses navigate the system effectively, and implementing robust anti-avoidance measures curbs aggressive tax planning and evasion, ensuring fair contributions from all corporations.
Maintaining policy stability provides a predictable environment for business planning, and enhancing administrative efficiency through modernized infrastructure and training ensures consistent application of tax laws. Regular impact assessments help identify and correct unintended disparities, and promoting public awareness and engagement ensures responsive and inclusive policy-making. These measures collectively aim to create a transparent, fair, and efficient tax system that supports economic growth and equitable development across sectors and regions.
Conclusion
In conclusion, understanding corporate tax disparities in India requires a detailed examination of their causes and the resulting implications for tax policy. These disparities arise from sector-specific incentives, regional tax variations, complex compliance requirements, tax avoidance practices, frequent policy changes, and administrative inefficiencies. Such factors create an uneven playing field, influencing business decisions, economic efficiency, and regional development.
Sector-specific incentives and regional policies lead to resource misallocation and economic imbalances, while the complexity of tax compliance places a heavier burden on smaller businesses. Large corporations’ tax avoidance strategies further exacerbate these disparities, undermining the tax system’s fairness and effectiveness. Frequent policy changes add to uncertainty, hindering long-term business planning and stability. Administrative inefficiencies and corruption contribute to inconsistent application of tax laws, leading to preferential treatment and deepening disparities.
To address these issues, comprehensive tax policies are essential. These should include standardizing incentives, harmonizing regional policies, simplifying compliance requirements, and implementing robust anti-avoidance measures. Ensuring policy stability, enhancing administrative efficiency, conducting regular impact assessments, and promoting public awareness and engagement are critical steps toward a more equitable and efficient corporate tax regime. These measures foster fair competition and economic growth, ensuring that development benefits are distributed more evenly across all sectors and regions. This balanced and inclusive economic environment will support sustainable growth and enhance the overall economic well-being of India.
References
- The hardest thing to understand in the world is the Income tax, Navigate, https://navigatestudentsloans.com/income/-tax/
- Suprio De, Recent Reforms in India’s Corporate Tax Regime: Rationale, Impacts and Improvements, NIPFP Working Paper Series, No. 393 (April 2023)
- CMIE, Public Finance, Economic Intelligence Service Mumbai, 2000
- Dr. Ved Parkash, Role of Corporate Income Tax in India’s Tax System, 35 (1) April (2014) pp – 73 to 84
Submitted by Aakaash Suryaah, 4th B.A.,LL.B., Under Graduate Student, Chennai Dr. Ambedkar Government Law College, Pudupakkam, Tamil Nadu.