The Indian economy and its association with corporate tax have been in the spotlight recently. The key performance indicators of these financial terms provide insight into the economic state of the country. Recently, the focus has shifted to corporate tax collections crossing 3% of the Gross Domestic Product (GDP) after two years. This substantial increase indicates an impressive improvement in India’s overall profitability.
Recent Increase in Corporate Tax Collection
In the financial year 2021-22, the net corporate tax collection significantly rose to more than 3% of the GDP. This significant increase can be attributed to a heightened demand for goods and services which subsequently caused a surge in the profitability rates of businesses in India. However, the current tax collection still falls short of the 3.51% of GDP record set in 2018-19.
Corporate Tax Collection in Numbers
The net corporate tax collection for 2021-22 was calculated at Rs 7.12 lakh crore with the GDP at current market price standing at Rs 236.64 lakh crore. This translates to a 3.01% share of net corporate tax in the GDP. In a move to stimulate investments, the government reduced the corporate tax rates for new manufacturing units by almost 10% in 2019-20. This reduction was mirrored in the corporate taxes realized in 2019-20 when collections dropped to over Rs 5.56 lakh crore, accounting for 2.77% of the GDP.
Understanding Minimum Alternate Tax
The concept of the Minimum Alternate Tax (MAT) is a critical part of corporate tax. Designed to eliminate income tax loopholes, MAT ensures that every business pays income tax, irrespective of their financial standing or revenue, even after claiming exemptions. Recognizing its potent mechanism, the government reduced the rate of MAT from 18.5% to 15% back in 2019.
What is the Corporate Tax?
The Corporate tax, payable by both public and private companies registered in India under the Companies Act 1956, is a direct tax charged on a company’s net profit earned from its operations. This tax is computed by deducting allowable expenses such as the cost of goods sold, operating expenses, and depreciation from the corporation’s total revenue.
Significance of Corporate Tax
Serving as an essential revenue source for the government, corporate tax plays a substantial role in funding public utilities and services like schools, healthcare institutions, roads, and military defense. Additionally, it aids in redistributing wealth, imposing a higher tax burden on more profitable corporations and addressing income inequality.
Corporate tax can also noticeably influence economic and social impacts. For example, it determines a country or region’s competitive business status as locations with higher corporate tax rates might be less attractive for investment compared to lower tax rate areas. The tax environment can also influence the location and types of businesses within a jurisdiction.
The Diverse Views of Corporate Tax
The implications of corporate tax depend greatly on the specific context and objectives of the government and its society. While some see corporate tax as a crucial means to finance public goods and foster social justice, others perceive it as a possible hindrance to businesses and economic growth potential.
