Notes on Tax Structure in India: Corporate Tax Vs Personal Income Tax
In the realm of tax collections, a notable shift has emerged where personal income tax (PIT) now surpasses corporations tax contributions to the central government’s coffers. This nuanced trend warrants analysis, especially considering its implications on fiscal policies and economic dynamics.
Analysis
| Fiscal Year | Corporation Tax Collection | Corporation Tax (% of GDP) | Personal Income Tax Collection | Personal Income Tax (% of GDP) |
| 2020-21 | Rs 9.23 lakh crore | 3.11% | Rs 10.22 lakh crore | 3.45% |
| 2023-24 | Rs 10.43 lakh crore | 3.18% | Rs 11.56 lakh crore | 3.53% |
The trend of PIT outpacing corporation tax can be attributed to multiple factors. Despite a surge in profit-before-tax (PBT) for corporations between 2018-19 and 2021-22, their tax provisions witnessed a relatively modest increase. Consequently, profit-after-tax (PAT) soared, aided by a corporate tax rate reduction in September 2019.
Recent data from over 5,000 listed companies also reveals a disparity in the tax structure in India, with PBT rising substantially while corporation tax paid exhibited a comparatively moderate increase. This indicates that the tax structure in India becoming a favourable tax environment for corporations, potentially contributing to the widening gap between corporate and individual tax contributions.
Furthermore, the surge in PIT collections is primarily attributed to higher surcharges levied on individuals in higher income brackets. However, such a strategy may have unintended consequences, as evidenced by a notable increase in individuals relinquishing Indian citizenship, possibly due to heightened tax burdens.
Adverse Implications
Raising Question over Fairness in taxation
The current tax structure in India appears to favour corporations over individuals, raising questions about equity and fairness in the system.
Private Consumption Growth Remains Sluggish
Despite increased PIT collections, private consumption growth remains sluggish, signalling challenges in stimulating consumer spending amid changing tax dynamics.
Impacting Govt capacity to spur economic activity and investment
Restrict the government’s ability to implement tax cuts or incentives impacting its capacity to spur economic activity and investment. Because private consumption growth is slow and no growth in investment by corporates despite tax incentives.
No Change in Corporate behaviour Despite Incentives
Despite tax incentives, corporate investments have not met expectations, raising concerns about the efficacy of tax policy measures in driving economic growth.
Jump in Individuals giving up Indian Citizenship
Higher taxes might be the reason behind the jump in individuals giving up Indian citizenship, a jump of 50% since 2019.
Conclusion
The evolving landscape of tax collections underscores the need for a comprehensive review of the tax structure in India to ensure equitable distribution of tax burdens and promote sustainable economic growth. Balancing the interests of corporations and individuals while fostering investment and consumption remains a critical challenge for policymakers in navigating towards a fair and equitable tax structure in India.
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