The central government published its accounts for 2020-21 on Monday. For the first time in 12 years, income tax collections were higher than the corporation tax collected by the government. This can be seen in the chart accompanying the piece, with the income tax curve and the corporation tax curve, which have run largely parallelly over the years, crossing for the first time.

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The income tax collected during the year stood at ₹4.69 trillion. That’s ₹12,000 crore more than the corporation tax collections of ₹4.57 trillion. Income tax primarily consists of tax on income paid by individuals and Hindu Undivided Families (HUFs). Corporation tax is the tax paid by companies on the profit they make.

The question is, why has this happened? An obvious argument would be that companies have suffered because of the pandemic and ended up making smaller profits and, hence, paid lower taxes. But that isn’t entirely true. The profit after tax of listed companies that have published their earnings for 2020-21 rose to 2.6% of gross domestic product, the highest since 2014-15 when it was at 3.1%. This is even before all companies have reported their earnings. The profits for listed corporates were at 1.1% of the GDP in 2019-20.

Profit after tax as a percentage of the total income of listed companies, or the net margin, jumped to 9.1%, the highest since 2007-08 when it was at 10.2%. Of course, other than listed companies, the unlisted firms also pay corporation tax.

In this scenario, it is surprising that the corporation tax collections in 2020-21 were lower than the income tax collected. Further, the corporation tax collections in 2020-21 were around 17.9% lower than in 2019-20, when they had stood at ₹5.57 trillion. In comparison, income tax collections fell by just 2.3% between 2019-20 and 2020-21. They had stood at ₹4.80 trillion in 2019-20.

So what’s happening here? In September 2019, the Centre cut the base corporation tax rate to 22% from the earlier 30% and 15% from the earlier 25% for new manufacturing companies. This was done “to promote growth and investment” and “to attract fresh investments in manufacturing and thereby provide boost the Make-in-India initiative”. But that doesn’t seem to have happened, with the investment-to-GDP ratio in 2020-21 falling to a two-decade low of 27.1%. It was at 28.8% in 2019-20. The ratio has largely been falling since peaking in 2007-08 at 35.8%. Hence, we have a peculiar situation where listed corporations have made their highest profits ever, and the corporation tax collections have declined.

The extent of the fall can be gauged from the fact that corporation tax collections in 2020-21 were almost similar to that in 2015-16 when they were at ₹4.53 trillion. We have gone back five years on this front. This shows that income tax rather than corporation tax should have been cut in September 2019. That would have put more money in people’s hands who would have likely spent it, helping the economy. But the government cut the corporation tax instead.

Another possible explanation for the fall in corporation tax collections might lie in how listed corporates boosted their profit last year. They cut costs by renegotiating terms with their suppliers and contractors. These suppliers and contractors also renegotiated terms with their suppliers and contractors and employees to stay in business. It is well documented by now that the small and medium enterprises have been facing a tough time.

In the process, the profits of these suppliers and contractors have come down, leading to lower corporation tax collections for the government, given that it’s not just listed corporates that pay tax.

What emerges from the analysis is that large corporates have benefitted at the cost of small and medium enterprises. This has led to a weird situation where income tax collections have been higher than the corporation tax collected. It is worth remembering here that the Bharatiya Janata Party favoured abolishing income tax when it was in the opposition.

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