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Effective Tax Rates for Indian Companies Post-liberalisation
This article studies the effective tax rate for Indian companies from 1990 to 2010, covering the period just before liberalisation of the economy and tax reforms in 1991 and later. It examines the effect of a declining corporate tax rate on the gap between book profit and taxable profit. A narrowing gap between statutory tax rates and effective tax rates after liberalisation indicates increased voluntary compliance.
Corporate tax rates vary a great deal across countries. Approaches to it are also different, as some Organisation for Economic Co-operation and Development (OECD) members such as the United States (US), Israel, and Ireland tax their resident corporations on worldwide income while a majority of others, including the United Kingdom (UK), France, Italy, and Germany, follow a territorial model and do not tax the foreign income of their corporations. India follows the worldwide income taxation model. Over the years, corporate tax rates have been significantly reduced in India and abroad. After the balance of payment crisis in 1990, the Indian government reduced tax rates across the board. The theory that lower rates would increase the tax base to offset any decrease in the total collection due to decreased tax rates gained acceptance. The theory has been vindicated by trends in tax collection over the years.
Figure 1 (p 22) depicts corporate tax rate (including surcharge and cess) plotted over the years. As can be seen from the figure, it has been steadily declining.
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