Budget 2018: Which industry pays the most taxes?

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While finance minister Arun Jaitley had announced in his first full budget in 2015 that corporate income tax rates would be rationalized in the following years, we are yet to see significant action on that front. In the last three Union budgets, there have been some limited measures to cut the marginal income tax rate to 25% for a small section of companies, but the overall tax structure has remained unchanged. As a result, thanks mainly to various rules and exemptions, we have the situation where companies of different sizes and in different industries pay income tax at vastly different rates. A recently published data set offers us an insight into this.

Aswath Damodaran, a professor of finance at New York University who is widely considered to be a guru of valuation, puts out an annual data set that contains metrics that are considered important to valuing companies. These metrics include measures of cost of capital, discount rates, valuation multiples, cash flow, etc.

Each January, Damodaran collects data for a large number of listed global companies (this year’s list contains over 42,000 companies) and then provides averages based on region and industry. This year, for the first time, he has produced data for India as a separate country (until last year, it was bunched up with other “emerging markets”), and among the variables covered is the effective tax rate paid by companies in different industries. (see here)

This is calculated based on annual financial statements, which contain both the total taxable income for a company and the total taxes paid. This way, we can compute the effective tax rate at different levels, such as region, industry, company group, etc.

Taking into account only industries which have at least 10 listed companies (in order to avoid getting biased by small samples), we find through Damodaran’s data set that effective tax rates vary from as little as 11% (in the case of retail distributors) to as much as 43% in the case of steel (we only consider data from profitable companies since loss-making companies pay no income tax, and can thus skew the numbers). Other high taxpayers include electronics (general) and recreation which pay a tax rate of 35%.

On an average, listed Indian companies pay 27.7% of their taxable profits in taxes (again based on Damodaran’s data set, we had analysed marginal and effective tax rates across different countries a couple of years back.

Table 1 shows a full list of industries along with their effective tax rates.

The average tax paid by profitable companies in India (27.7%) is much higher than the corresponding global figure (24%). This difference, however, varies by sector. Table 2 shows the sectors where the tax rate between firms in India and firms globally exceeds 5 percentage points (in either direction).

As we can see, there is only a handful of sectors where Indian companies are tax-competitive: retail (distribution), business and consumer services, retail (special lines), information services and metals and mining. The number of sectors where Indian companies face a massive tax disadvantage is much larger (this is to be expected since Indian firms pay a much higher average tax rate). Table 2 also lists out the sectors where Indian firms are significantly less tax-competitive than global firms. This list includes, among others, steel, shoes, publishing, education and green and renewable energy.

Irrespective of what Jaitley does in this year’s budget, this list is unlikely to change by much in Damodaran’s data set next year (since any tax changes will only be applicable from the next financial year onwards). It will be interesting to see how the numbers look in Damodaran’s data set two years hence.livemint