By R Jagannathan
The rich must pay more tax has been the finance ministry’s maxim of late. Hence the additional 10 percent surcharge on those with incomes over Rs 1 crore in this year’s budget.
However, the budget papers disclose an interesting anomaly where rich companies pay less taxes than the poor. The finance minister has, in fact, offered them a further dollop of tax sops in the form of a 15 percent investment allowance for manufacturing companies - for those investing over Rs 100 crore in the next financial year.
In the budget’s annual statement on revenues forgone, we find that the effective tax rate becomes higher the bigger a company’s profits get.
Figures for 2011-12 – the latest for which the finance ministry has computed details – show that companies with smaller profits before taxes (PBT) paid higher effective tax rates than those with more moolah in their cupboards. Effective tax rates are taxes actually paid, after deductions and special incentives, as a percentage of total pre-tax profits.
Guess what: companies earning less than Rs 1 crore of PBT paid effective tax rates of 26.26 percent while those at the opposite end – companies with PBT of over Rs 500 crore – paid just 21.67 percent. That’s almost a full five percentage points lower.
The effective tax rates for various pre-tax profit ranges in a sample of 4.94 lakh companies are: PBT upto Rs 1 crore (26.26 percent); Rs 1-10 crore (25.16 percent); Rs 10-50 crore (Rs 23.21 percent); Rs 50-100 crore (22.54 percent); Rs 100-500 crore (21.63 percent); and above Rs 500 crore (21.67 percent). For the entire sample, and average effective tax rate was 22.85 percent.
It’s obvious why the rich companies pay less tax. Not only do they claim higher deductions from tax concessions and loopholes, but they also have better lobbying power.
The 15 percent investment allowance next year will make the rich companies richer.
Two other interesting facts to emerge are that the public sector pays less effective tax rates than the private sector, with 22.21 percent against 23.10 percent for private firms.
Also, service sector companies, which would include the IT sector, pay more tax (23.70 percent) than manufacturing companies (22.01 percent).
So it is not true that the services sector is some kind of favoured child while manufacturing gets step-motherly treatment – at least when it comes to taxes.
The FM should walk the talk on taxing the rich more if he wants to retain his credibility.