Revise direct taxes: Corporate taxation needs to be progressive

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₹0-1 crore. This is the largest group of companies that pay taxes. Firms with profits in the range of ₹1-10 crore, ₹10-50 crore, ₹50-100 crore, ₹100-500 crore and with profits above ₹500 crore are in separate brackets.

The highest profit-making companies are the smallest in number but together record the bulk of profits. As against the statutory tax rate of 34.6% in 2017-18, the effective tax rate for all companies was 29.5%. In 2018-19, it declined marginally to 27.8%.

But even in these two pre-2019 years, the lowest effective tax rate was for the richest companies, at 26.3% in 2017-18 and 25.9% in 2018-19. However, the tax rate was at least progressive in lower brackets till the ₹100-500 crore category. In 2018-19, the effective tax rate for the ₹0-1 crore category was 26.6%, rising steadily to 28.3% for the ₹100-500 crore category.

The immediate consequence of the 2019 tax breaks was a sharp decline in the effective tax rate to 22.5% in 2019-20 from an average of 29% in the preceding years. It has remained at that level till at least 2021-22 (for which data is available). The largest beneficiaries were the richest companies, for whom the effective tax rate declined from an average of 26% to 20%.

But for the ₹0-1 category, it was only a marginal decline from an average of 26% to 25%. In fact, for 2021-22, the effective rate pattern is an inversion of 2018-19’s: the poorest companies have borne the highest effective tax rate, with the rate declining as a firm goes up the profit brackets. Thus, the 2019 changes not only reduced effective tax rates, but also made the tax structure regressive.

Tax incentives would have been justified had they led to job creation or more investment. Neither happened. Not only did the