Corporate Tax

Covid, decrease charges push corporate tax levies beneath personal tax for the primary time in years

Representative image | Dhiraj Singh | Bloomberg

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New Delhi: Due to the negative impact of the Covid-19 pandemic on companies and the lower tax rates that came into effect two years ago, corporate tax levies fell under income tax in the last financial year – for the first time in years.

Corporate tax levies on corporate profits decreased 18 percent over the 2020-21 period, while income tax levies declined only 2.3 percent.

The data released by the Controller General of Accounts showed that corporate tax levies were Rs 4.57 lakh crore and personal income tax was Rs 4.69 lakh crore over the 2020-21 period.

Graphics: Ramandeep Kaur / ThePrintGraphics: Ramandeep Kaur / ThePrint

While corporate income tax is levied on corporate profits, income tax is levied on income generated by individuals.

After the Narendra Modi government came to power for a second term, it cut corporate tax rates by around 10 percentage points in September 2019. The effective tax rates have been reduced to around 25 percent for existing companies and to around 17 percent for new companies in the manufacturing sector.

Also read: Moody’s forecasts India’s GDP growth of 9.3% for the current fiscal year, up from 7.9% in FY23

Factors that influenced the collection

NR Bhanumurthy, Vice Chancellor of Dr. BR Ambedkar School of Economics University in Bengaluru said a combination of factors could explain the decline in corporate tax collections over the 2020-21 period.

“A cut in tax rates and a fall in GDP due to the pandemic could explain the decline in corporate tax collections,” he said.

Even though manufacturing was able to resume operations after the first few months of lockdown in 2020, the service sector is still struggling and is either completely closed or operating at reduced capacity.

This has had a negative impact on the profitability of companies in sectors such as civil aviation, entertainment and hospitality. Many small businesses are also said to have closed because of the pandemic.

Bhanumurthy pointed out that the resilience of income tax collections could be due to better reporting of all incomes and possibly higher dividend payouts from non-investing companies.

“The profits will be used for expansion activities and dividends. However, if future demand is uncertain, companies may have paid higher dividends to shareholders, which has resulted in an increase in personal income. Better reporting of income on forms like 26AS could also have helped increase income tax, ”he said.

Decline in the past two years

Due to the sharp cut in tax rates as well as the economic slowdown, corporate tax levies have declined in the past two years after peaking at 6.6 lakh crore in 2018/19.

Corporate tax collections fell 16 percent in 2019-20 and 18 percent in 2020-21. The collections have even declined by more than 31 percent compared to 2018-19.
Corporate tax returns also support this trend.

Nearly 15 lakh income tax returns were filed by companies in 2020-21 for income from the previous year. However, only 13 percent of those returns were for income ranges greater than Rs 5 lakh. The remaining 87 percent of the proceeds were for incomes up to Rs 5 lakh.

In contrast, over 13 lakh declarations were filed in 2019-20 (for incomes earned in 2018-19), with 18 percent of the returns for income ranges above Rs 5 lakhs. The remaining 82 percent was submitted for incomes up to Rs 5 lakh.

Also read: The economic impact of the second wave of Covid will not be great, says CEA KV Subramanian

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