In the landscape of India's economic narrative, the "Effective Tax Rate" (ETR) emerges as a crucial, yet often overlooked, metric. It reflects the true tax burden on businesses, accounting for incentives, disallowances, and the complexities of the tax regime. As India progresses towards its vision of "Viksit Bharat," understanding and optimizing the ETR is vital for sustaining economic growth, enhancing ease of doing business, and promoting fair fiscal practices.
The ETR is not merely a statutory rate; it's the actual tax rate borne by businesses after considering various factors. These include incentives, deductions, timing mismatches, litigation, and administrative challenges. These implicit and intangible costs, often neglected in compliance counts and statutory rate comparisons, significantly impact business decisions and outcomes.
India's tax landscape is characterized by complexity, encompassing numerous central and state acts, individual compliances, and annual filings. The finance and taxation domain alone involves a substantial number of acts and compliances at both central and state levels, each with its own rates, levies, fees, and associated costs. This complexity can lead to uncertainty, interpretation risks, and cash-flow lock-ins, all of which affect the ETR.
The Indian government offers various corporate tax rates. Domestic companies are generally taxed at 22%, plus a surcharge and a 4% health and education cess. Certain manufacturing companies may qualify for a 15% rate. Companies with a turnover of up to ₹400 crore may be taxed at 25%, while others face a 30% rate. The Income Tax Act of 1961 allows domestic companies to opt for a reduced rate of 22%. Surcharges also vary based on income level. For instance, domestic companies may face a 7% surcharge for income between ₹1 crore and ₹10 crore, and 12% for income exceeding ₹10 crore.
Recent changes in income tax slabs and rates, particularly under the new tax regime, have further altered the landscape. For the financial year 2025-26, income up to ₹4 lakh is tax-free, with progressive rates applying to higher income brackets. A rebate under Section 87A has been increased to ₹60,000 for taxable incomes up to ₹12 lakh, effectively reducing the tax liability to zero for individuals earning up to this amount. Salaried employees also benefit from a standard deduction, raising the tax-free income threshold to ₹12.75 lakh.
The government has been effective in framing policies and initiatives that are not only beneficial for citizens to improve their financial stability but also for the overall growth of the economy. India's direct tax-to-GDP ratio reached 6.6% in 2023-24, the highest in fifteen years, and is expected to be around 6.7% for the following year. Similarly, the indirect tax-to-GDP ratio stood at 6.86% in 2023-24, slightly increased from the previous year.
To deliver tangible impact across businesses, from large corporations to MSMEs, there is a need to reorient the tax regime. This involves simplifying the tax structure, reducing tax evasion, and improving tax compliance. Encouraging trade and addressing unproductive expenditures can also contribute to a more efficient tax system. The government should also reexamine tax exemption policies for various sectors. By streamlining the tax regime and reducing complexities, India can create a more conducive environment for economic growth and investment.
