Recent Reforms in India’s Corporate Income Tax Regime: Rationale, Impacts, and Improvements

Abstract

In a recent innovative policy reform, India’s corporate income tax system was overhauled with optional lower rates in lieu of giving up complex deductions. However, official data reveals a puzzle wherein larger companies have opted more for the lower optional rates, while smaller ones appear reticent in switching to the optional regime. This paper explores this issue using empirical methods. The evolution of tax rates is tracked through reforms simplifying the tax system in the 1990s, the subsequent conundrum of zero-tax companies leading to the introduction of minimum alternate tax, and the persistence of lower effective tax rates for larger companies. This provides the rationale for a simpler tax regime with lower rates but fewer deductions. The user cost of the capital approach is used to examine the economically relevant tax impact across various sectors and ownership types. The results indicate that in terms of user cost, the various lower tax options are not attractive, and under certain situations may be worse for younger and smaller companies. In light of the analysis, policy options are suggested to improve the scheme so as to achieve the laudable objective of implementing a simple tax regime with lower rates and minimal deductions.

Thanks are due to Adam Hussain, Prachi Jain, and Neeti Gupta for research assistance and to Usha Mathur for secretariat support functions.

The chapter is a re-publication of the author’s working paper and is being re-used here with permission.

De, S. (2023). Recent Reforms in India’s Corporate Income Tax Regime: Rationale, Impacts and Improvements, NIPFP Working Paper Series, Working Paper No. 393. National Institute of Public Finance and Policy, New Delhi: India.