Profits for corporates, taxes for individuals

An interesting point that did not get discussed enough in the post-budget analysis is that personal income tax (PIT) now contributes more to the central government tax collections than that paid by corporations. In 2024-25, the government expects to earn Rs 10.43 lakh crore, or 3.18% of GDP, through corporation tax, and Rs 11.56 lakh crore, or 3.53% of GDP, through PIT.

This is only the third time since 1991-92 that something like this is happening. The only two other instances being 2020-21 and 2023-24. Now, 2020-21 can be ignored as the pandemic year, leaving us with 2023-24 or the current financial year. In 2023-24, the government expects to collect total corporation tax of Rs 9.23 lakh crore, or 3.11% of GDP, and PIT is expected to be at Rs 10.22 lakh crore, or 3.45% of GDP.

Why is this happening? Are corporations earning lower profits and hence paying lower taxes? Aggregate data of around 35,000 companies sourced from the Centre for Monitoring Indian Economy (CMIE) suggests that profit-before-tax (PBT) of these companies went up 144% between 2018-19 and 2021-22. Plus, the tax provisions went up just 39%, helping push up profit-after-tax (PAT) by 244%. The government cut the corporate tax rate in September 2019, remember?

Now, consider more recent aggregate data of more than 5,000 listed companies. The PBT of these companies went up 128% from 2018-19 to 2022-23. But the corporation tax paid by them went up just 35%, in turn pushing up PAT by 186%.

So, what does this mean? First, the income tax system, which needs to be fair before anything else, now favours corporations over individuals. Second, the collection of personal income tax has increased primarily because those in higher income brackets have had to pay significantly higher surcharges on their income.

These higher taxes might be the reason behind the jump in individuals giving up Indian citizenship. The government recently shared that around 2.16 lakh individuals gave up Indian citizenship in 2023, a jump of 50% since 2019, when the number was 1.44 lakh. The jump in the four-year period prior to 2019 was 9.5%.

So, higher surcharges might help bump up PIT collections in the short-term, but it may not be a great move in the long-term if it leads to individuals in the higher tax brackets giving up Indian citizenship.

Third, the corporation taxes in 2018-19 had amounted to 3.51% of GDP. In 2023-24, they are expected to be 3.11%. This fall has been more than made up through a jump in PIT from 2.44% of GDP to 3.45%. This has also helped the government make up the shortfall in the money earned through disinvestment of public sector enterprises. In 2018-19, the government had earned Rs 94,727 crore, or 0.5% of GDP, through disinvestment. In 2023-24, it is expected to earn Rs 30,000 crore, or 0.1%. So, the jump in PIT collections has made up for not just the fall in corporation tax but also for the fall in disinvestment receipts.

Now, private consumption growth in 2023-24 is expected to be at 4.4%, the slowest since 2002-03, except for the pandemic year of 2020-21. Private consumption forms 57% of the Indian economy. The government could have slashed personal income tax rates in the interim budget, especially for those earning more than Rs 10 lakh a year, and encouraged people to spend more and drive consumption. But given the fall in corporate tax collections, it cannot.

Fourth, the government could have cut down the massive indirect taxes it earns on the sale of petrol and diesel, and in the process helped put money in the hands of citizens. It could also have looked at cutting down GST on two-wheelers to help push up their sales. But it can’t.

Finally, the cut in the corporate tax rate was supposed to incentivise corporates to invest more. Instead, as Nikhil Gupta and Tanisha Lada of Motilal Oswal, a stock brokerage, said in a June 2023 research note, in 2022-23, the share of corporate investments as a proportion of overall investments fell to its lowest in 19 years. Further, data from CMIE shows that the cost of new investment projects announced during April-December 2023 has fallen by close to 54% in comparison to the same period in 2022.

So, today, corporations are making more money than ever before, not investing as much as the government expected them to when it cut the corporate tax rate, and are paying lower taxes than before. That’s the long and short of it.