The step in question is the Centre’s decision to slash corporate taxes in September 2019.
In a bid to improve overall economic growth in the country, the Union Government had announced a hefty reduction in corporate tax rates from 30 per cent to 22 per cent.
Taking into account all surcharges and cesses, the effective corporate tax rate accordingly came down to 25.2 per cent, provided that firms did not avail of any other tax incentives or benefits.
“Indian corporates were shielded from the pandemic by the rationalisation in conduct of business that focused on cost saving and a corporate tax rate cut in September 2019,” the RBI said in its Annual Report for 2021-22.
“This tax cut was in league with other countries as observed across the Organisation for Economic Cooperation and Development (OECD) countries.”
Prior to the tax reduction, the effective rate for the Indian manufacturing sector was at 27.8 per cent, while that for the non-manufacturing sector was higher at 30.5 per cent on an average, constraining the competitiveness of domestic exports, the RBI’s report said.
Apart from the decision to slash the corporate tax rate from 30 per cent, the effective tax rate for new manufacturing companies would stand at 17 per cent, increasing the incentives for fresh investment, the report said.
“A difference-in-difference (DID) panel regression to assess the differential impact of the tax rate cut attempts to test the hypothesis that firms in sectors which benefited from the tax rate cut in terms of lower effective corporate tax rate (ETR) registered higher net profit margin (NPM) during the post-tax cut period than in the pre-tax cut period,” the report said.
The cut in the corporate tax rate would only increase the profit after tax, with the profit before depreciation, interest and tax remaining unchanged, the report said,
As the effective tax rate at a company level was not directly available, the same was computed for each firm as the ratio of corporate tax paid to total fixable income, the RBI said in the report.
“Net profit margin (NPM) turns out to be significantly higher for firms in the treatment group in both manufacturing and non-manufacturing sectors,” the report said.
“Net profit margin improves significantly in the post-tax cut period. Furthermore, the impact of the tax rate cut on profitability is stronger for the non-manufacturing sector than for the manufacturing sector.”