Corporate tax down, IT up: Why Budget 2026 must rethink 2019 tax regime
Lower corporate rates have failed to boost investment or jobs while shifting the tax burden on to stressed households
Despite “swimming in excess profits”, to borrow the phrase from the Economic Survey of 2023-24, India Inc is contributing less and less to the gross tax collection. Not only have corporate tax collections dipped well below personal income tax (“taxes on income” in budget documents), but also the gap is widening by the day.
This is evidence of a regressive tax system that stymies growth.
The graph below maps the trend in percentage of gross tax collection. Note the sharp drop in corporate tax collection in FY20, when the base rates were slashed to 15-22 per cent (15 per cent for new firms and 22 per cent for all domestic firms). It dipped below personal income tax collection in FY21, the pandemic fiscal, reversing the earlier trend. Having swapped the position, the gap continued to widen since.
This is regressive because it violates the cardinal principle of ‘ability to pay’ – the better the ability to pay, higher the tax burden.
Burden on IT payers
Personal income tax (IT) is paid by the salaried and self-employed, other individuals with capital income, Hindu Undivided Families (HUFs), trusts and Association of Persons (AOPs) and Body of Individuals (BOIs) earning money with or without commercial intent – who have comparatively lower ability to pay tax.
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This is one aspect of India Inc.
The other is what Chief Economic Advisor Anantha V Nageswaran pointed out in December 2024: “creeping informalisation” (more contractual hiring than regular ones). Since the pandemic, the wage growth has “not” been keeping pace with inflation (stagnated), and the two together exert a downward pressure on consumption. Fall in consumption means fall in demand for the goods and services India Inc produces. Hence, he called it “self-destructive”.
Little impact of tax cut
The September 2019 corporate tax cut – foregoing Rs 1.45 lakh crore of revenue – was a waste. It didn’t lead to higher capex or job creation as the Centre had promised. Instead, the RBI’s annual report of 2019-20 said India Inc used the tax cut to repair debts, build cash balance and other current assets.
The impact of the tax cut was devastating.
Average growth in corporate tax collection fell from 12 per cent before the tax cut (FY09-FY19) to 9 per cent thereafter (FY20-FY26 (BE). As percentage of GDP, corporation tax collection too fell from an average of 3.9 per cent during FY08-FY11 to 3 per cent during FY23-FY26 (BE).
This fall means fewer financial resource is available for growth and development.
There is more.
Gaming the system
The corporate tax cut of 2019 had reduced base rates from 30 per cent to 22 per cent for all corporations and 15 per cent for all new corporations that don’t claim “any exemption or incentive”.
But that is not the case. Budget documents show companies making highest profits are paying least tax.
The following graph maps effective tax rates for different profit levels (profit-before-tax or PBT) in FY19 and FY23 (up to which data are available) – before and after the tax cut. Note, those in the middle were paying higher tax earlier, but not after the new regime. As usual, those making maximum profits (over Rs 500 crore of PBT), are paying at the lowest effective tax rate.
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The trend in other fiscals is similar in both pre- and post-tax cut phases.
The skewed tax rate suggests that many profit-making companies in the middle and at the highest level have either shunned the new tax regime or have managed to game the system.
The Budget 2025 document admits that “a large number of companies (6,62,877, or 61.61 per cent) contributed a disproportionately lower amount of taxes in relation to their profits”.
But its explanation is obfuscating. It says, “This highlights that the larger companies are availing the higher deductions and incentives or have shifted to the new regime of lower tax rate of 22 per cent plus cess and surcharge.”
If the larger companies are paying the least tax either way, what is the point in the new regime that entailed massive loss of tax revenue? It should be withdrawn.
The budget document doesn’t even reveal how many companies have shifted to the new regime to pinpoint what exactly is the case.
Here is another evidence that the tax regime is deeply flawed.
Revenue foregone endures
Starting with FY16, the budgets introduced an accounting change in which indirect tax concessions were divided into “conditional” and “unconditional” ones, with the “unconditional” ones not counted on the plea that those were meant for all industries because of certain policy imperatives.
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Another was added from FY18. Budgets stopped showing revenue foregone in central excise (indirect tax), saying that it had merged with the GST. But that wasn’t entirely true. High-value petrol and petroleum products remained out of GST.
These two moves meant that if the larger companies are paying the least tax either way, what is the point in the new regime that entailed massive loss of tax revenue? It should be withdrawn as the actual revenue foregone to corporations are grossly under-reported.
Nonetheless, the following graph maps revenue foregone in direct and indirect taxes (basic customs duty) that budget documents reveal. The fiscals have been selected to show the two pre-tax cut periods and the latest two fiscals post-tax cut. These are representative of the general trend in both the period.
Note, there is little change in the two periods, except a few minor variations that are normal.
Why did IT surge?
Unlike its liberal approach to corporate tax collection, the Centre has been meticulous in tracking and ensuring personal income tax is paid. Thus, the reliefs in personal income tax have not dented its collection, rather it has surged.
This was done through formalisation moves like the GST, push for digital payments, e-invoicing and better data harnessing like PAN-Aadhaar linkages, reporting by banks and mutual funds reporting etc.
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As the following graph shows, the fall in corporation tax collection is more or less matched by the surge in personal income tax and also another regressive tax, the GST (indirect tax).
Given the damage the corporate tax cut of 2019 has done to the economy, the forthcoming budget must withdraw it to drive home the point that there can’t be endless free lunches.
