Smaller companies end up paying higher taxes

State-owned companies have higher effective tax rates than private firms.

The effective tax rate for companies, while much lower than the statutory tax rate of 33.99%, has been slowly going up in recent years. In 2005-06, the effective tax rate for a sample of 301,736 companies was 19.26%, according to the Budget documents. In 2006-07, for a sample of 328,061 firms the rate was 20.6% in 2007-08, a sample of 410,451 companies showed an effective tax rate of 22.24%.

Of course, the overall number conceals wide divergences in rates among companies. In 2007-08, for example, while the average effective tax rate was 22.24%, 16.4% of the companies in the sample, which accounted for 44.6% of total profits, had an effective tax rate of 0-20%. At the other extreme, 10.7% of the companies, accounting for 14.3% of total profits, had an effective tax rate of above 33.99%.

Bigger firms have a lower tax rate as they are able to avail of the loopholes more easily. In 2007-08, for instance, companies that had profits before tax of less than Rs1 crore, which accounted for the majority of companies, had an effective tax rate of 24.04%.

By contrast, firms with profits before tax between Rs50 crore and Rs100 crore had an effective tax rate of 20.14%. The largest companies with profits before tax in excess of Rs500 crore had an effective tax rate of 21.85%. But while the rate of the smallest firms has come down marginally, that for the larger companies has increased between 2005-06 and 2007-08.

State-owned companies have higher effective tax rates than private firms. For the former, the effective tax rate went up from 23.35% in 2006-07 to 25.69% in 2007-08.

For private companies, the rate was 21.28% in 2007-08, compared with 19.5% in 2006-07. While services companies have a lower overall effective tax rate than for manufacturing companies, effective tax rates increased for both in 2007-08.

The Budget documents also show the effective tax rates in various industries. In 2007-08, these ranged from a low of 3% for sugar manufacturers to a high of 40% for legal professionals. For IT-enabled services and business process outsourcers, the rate was 15%, while it was 12% for software developers. Property developers had an effective tax rate of 18%. Most of the manufacturing industries had tax rates between 16% (power and energy, tea and coffee, textiles) and 31% (printing and publishing).