Much of the discussion on the Union budget has focused on the Centre’s fiscal stance and its spending priorities. But the documents accompanying the budget also provide useful nuggets of information about the corporate, household and government sector, and as a consequence, the changing structure of the Indian economy. Four broad points emerge.
First, the larger firms have perhaps never had it so good in recent years. Alongside the trend of the rising share of capital and the falling share of labour in national income, within the larger corporate universe, a few big firms now account for an outsized portion of the pie. In 2019-20, of the 9 lakh plus companies who had filed returns, 433 firms had reported profits (before taxes) in excess of Rs 500 crore. In 2020-21, the first year of the pandemic, this rose to 517.
These 517 companies accounted for 62.08 per cent of total profits of the corporate sector in 2020-21. Add to this the 1,558 companies whose profits ranged between Rs 100-500 crore, and together these 2,075 firms (who represent just 0.2 per cent of the entire corporate sector) accounted for 77.41 per cent of all profits. In comparison, just a year prior to the pandemic, firms with profits exceeding Rs 100 crore accounted for 75.2 per cent of total corporate sector profits. Data on listed companies suggests that this concentration of profits is likely to have continued in the period thereafter. While MSMEs and the larger informal sector have been showing some signs of recovery, it is difficult to know whether this stunning concentration of economic power has reversed.
Second, for these 517 companies, the effective tax rate works out to around 19.14 per cent, which is much lower than that for the smaller-sized companies. For firms with profits in the range of 0-1 crore and 1-10 crore, the tax rate was 24.82 per cent and 23.13 per cent respectively. As per the documents, these tax rate differentials imply that the larger firms have either availed of the higher deductions or incentives under the old tax regime or have shifted to the new regime of lower taxes. (In September 2019, the government had allowed firms to pay tax at the rate of 22 per cent, provided they did not avail of exemptions/incentives. And further, to attract fresh investments, new firms making fresh investments in manufacturing were taxed at an even lower rate of 15 per cent.)
So far, 1.96 lakh or 20 per cent of all firms have opted for the exemption-less regime. As these firms account for a little more than 60 per cent of total income, this suggests that the larger, more profitable firms are opting to shift. This is an encouraging sign. There are also indications that this regime has perhaps led to a reduction in tax disputes. The amounts under dispute which had gone up in 2020-21 from the previous year, fell in 2021-22.
However, despite high expectations, only 3,508 companies had opted for the 15 per cent tax regime during this period. This suggests that lower tax rates were perhaps not a strong enough incentive for fresh private sector investments in the manufacturing sector.
Third, contrary to expectations, the new personal income tax regime has, so far, not seen much traction. But, it is possible that the changes now being proposed will improve its attractiveness. Migration to the new regime will depend on the extent to which individuals take advantage of the existing exemptions. Broadly speaking, there are four major exemptions that individuals avail of under chapter VI-A, section 80 of the Income Tax Act — these are for investments, health insurance, the new pension scheme, and payment of rent. The revenue foregone by the government on these items ranges from Rs 74,937 crore on investments to Rs 4,810 crore on pension, Rs 6,444 crore on health insurance and Rs 1,361 crore on rent.
Back of the envelope calculations suggest that if a salaried taxpayer is availing of exemptions for investments and medical insurance, then the switching point will perhaps be a little less than Rs 9 lakh. However, the more the exemptions are availed, higher will be the income threshold at which the individual will want to switch to the new tax framework. But, considering that very few taxpayers actually use all these exemptions — the revenue foregone by the government provides some sense of how widely used each of these exemptions are — there is a strong possibility that more taxpayers will gravitate towards the new tax regime. Though, to what extent, will also be tempered by individual expectations of wanting to avail these exemptions in the future. This will have implications for the consumption spurt that government officials anticipate from this switch.
Fourth, the larger public sector, comprising of central and state governments and central public sector enterprises, now accounts for a much bigger share of overall investment activity in the economy than before. At the end of 2022-23, capital expenditure routed through the Union budget, coupled with the resources of state governments and central PSUs directed towards capital spending, would be just shy of a quarter of all investments (gross fixed capital formation) in the economy. Their share is up by roughly 5 percentage points since 2014-15. In the coming year, if state governments were to just match the central government’s budgeted increase in capex — state governments have in the past tended to allocate more for capital expenditure than the Centre — then it is likely that the share of the public sector in total investments in the economy would inch closer to 30 per cent.
Yet, despite record profits accruing to the larger firms, despite lower tax rates for both the corporate and the household sectors, and despite the ramp-up in capital spending by the public sector, a broad-based recovery in private sector investments and consumption has not materialised. Will 2023-24 be any different? Seems unlikely. Perhaps the government should ask why.
ishan.bakshi@expressindia.com
