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Indian Economy

Corporate Tax

  • 05 Jan 2023
  • 4 min read

For Prelims: Corporate Tax, Gross Domestic Product (GDP), Minimum Alternate Tax (MAT)

For Mains: Significance of Corporate tax, Minimum Alternate Tax (MAT) and its impact on the Indian economy.

Why In News?

Recently, corporate tax collections exceeded 3% of the GDP after a gap of two years in 2021-22.

  • It is reflecting overall improvement in profitability of India Inc propelled by an increase in demand for goods and services.
  • However, the corporate tax collection is yet to surpass its five-year high of 3.51% of GDP recorded in 2018-19.

What are the Key Highlights?

  • In actual terms, the net corporate tax collection in 2021-22 stood at Rs 7.12 lakh crore.
  • The Gross Domestic Product (GDP) at the current market price was Rs 236.64 lakh crore.
  • The percentage of net corporate tax to GDP worked out to be 3.01%.
  • In 2019-20, government cut corporate tax rates for new manufacturing units by almost 10% points as it looked to pep up investments.
  • The rate of Minimum Alternate Tax (MAT) too had been reduced to 15 % from 18.5 % in 2019.
    • The Minimum Alternate Tax is a strategy designed to close the income tax loophole for all businesses. The MAT makes sure that no business, even one with strong financial standing and significant revenue, may escape paying income tax, even after claiming exemptions.
  • The tax cut was reflected in the realization of corporate taxes in 2019-20, when collections fell to over Rs 5.56 lakh crore (2.77% of GDP).

What is the Corporate Tax?

  • Corporation tax is payable by both public and private companies registered in India under the Companies Act 1956.
  • Corporation tax is a direct tax placed on a company's net income or profit from its operations.
    • The tax is imposed on the net profits of the corporation, which is calculated by subtracting allowable expenses such as the cost of goods sold, operating expenses, and depreciation from the corporation's total revenue.

What is the Significance of Corporate Tax?

  • Corporate tax is an important source of revenue for governments, as it helps to fund public goods and services such as schools, hospitals, roads, and defense.
  • Corporate tax also plays a role in redistributing wealth and addressing income inequality, as it imposes a higher tax burden on corporations that are more profitable.
  • In addition, corporate tax can also have other economic and social impacts.
    • For example, corporate tax can affect the competitiveness of businesses, as a higher corporate tax rate may make a country or region less attractive for investment compared to other jurisdictions with lower tax rates.
  • Corporate tax can also influence the location and type of businesses that operate in a jurisdiction, as businesses may be more or less likely to invest in a particular area depending on the tax environment.

Conclusion

Overall, the importance of corporate tax depends on the specific context and goals of the government and the society. Some may view corporate tax as a necessary tool for financing public goods and promoting social justice, while others may view it as a burden on businesses and a deterrent to economic growth.

Source: IE

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