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Foreign companies now pay less tax relative to their earnings than at any time in more than three decades.
Foreign private companies paid 24.36 per cent of their pre-tax profit as tax in 2023-24, show numbers from the Centre for Monitoring Indian Economy (CMIE).
The numbers are from the firms that made their data available so far. Unlisted companies often file financials with a lag.
But the numbers can be considered broadly indicative of the trend because the sample of 390 firms includes around 60 per cent of the entities seen in previous years.
The tax outgo is a significant decline from the peak in 2017-18, when companies paid the equivalent of 48.43 per cent of their pre-tax earnings in the form of tax.
Taxes on foreign companies have been in the news after American President Donald Trump announced the country would not be part of a 2021 agreement on uniform taxation.
The agreement, signed by 140 countries, sought to reduce tax avoidance by mandating a minimum 15 per cent levy on corporate profits across countries. This now hangs fire after withdrawal by the United States.
The year 2018-19 saw corporate-tax cuts, which have seen a decline in the overall tax liability of companies in India. This includes foreign ones.
“…lower tax rate of 15 per cent (plus 10 per cent surcharge and cess) has been prescribed for new domestic manufacturing companies which have been set up between October 1, 2019, and March 31, 2024.
"Units in the International Financial Services Centres (IFSC) also enjoy a tax holiday for the first 10 years.
"Further, a lower rate of minimum alternate tax (MAT) of 9 per cent (plus surcharge and cess as applicable) has been prescribed for IFSC units subject to prescribed conditions (compared to a 15 per cent MAT rate for non-IFSC units),” pointed out Riaz Thingna, partner, tax, Grant Thornton Bharat.
Further declines may not be in the offing, according to Sameer Gupta, national tax leader, EY India.
“India has opted for a moderate tax regime.
"Therefore, we do not expect more corporate rate reductions and the focus will be on enforcement and ensuring a strict compliance framework,” said Gupta.
Indirect taxes have also seen a significant decline. They accounted for the equivalent of over 8 per cent of foreign private companies’ income in 2016-17, shows the CMIE data.
This has fallen to 2.52 per cent in 2023-24.
The indirect tax regime has been helped by the goods and services tax (GST) regime.
“The transition to GST in 2017 has eliminated cascading taxes, streamlined the tax structure, and allowed businesses to claim input tax credit efficiently.
"After GST, tax rates significantly reduced from around 27 per cent to 18 per cent in most cases.
"However, overall tax collection remained stable as the tax base expanded, the Centre imposed taxes across the supply chain, and the states gained the ability to tax services, bridging much of the revenue gap.
"Over the years, rate rationalisation for GST has further optimised tax efficiency, ensuring a more structured approach to taxation.
"Additionally, reforms in customs duties, including reductions in import duties and the impact of free-trade agreements (FTAs), have eased the indirect tax burden on multinational companies,” said Thingna.
Net tax costs have also been reduced through better compliance, digital integration, and optimised supply chain structures, which have helped tax planning and credit utilisation, he added.
Private companies in India paid the equivalent of 23.18 per cent of their pre-tax earnings taxes, according to the data available so far for 2023-24 (FY24). This was the lowest since 2008-09.
