Larger companies enjoy higher tax incentives and tax subsidies provided by the Government when compared with small-sized companies, suggests the Revenue Foregone statement under the Central Tax System for FY-2009 (part 
of the recent Budget document).
Large companies with over Rs 500 crore of profit before tax (PBT) had an effective tax rate of 22 per cent; much lower than the 25.5 per cent tax rate suffered by small companies (with less than Rs 1 crore of PBT).
Profit Before Tax
Effective tax rate is the percentage of corporate taxes paid by companies to the total profit before tax.
Clearly, the lower tax rate for large companies is on account of higher tax deductions and benefits enjoyed by them. The reason behind this could be the higher investment capability of large companies.
Tax incentives under the Income-Tax Act are typically awarded to capital-incentive sectors or projects such as power, infrastructure or higher spending in research and development, which entail high outlay or long gestation periods.
Sample Size
Smaller companies, typically in unorganised sectors, may not therefore be the recipients of such incentives. Overall, for a sample of 3.6 lakh companies (accounting for 90 per cent of all taxing paying companies), the effective tax rate for FY-09 was 22.7 per cent as against the statutory corporate tax rate of 33.9 per cent. The above taxes exclude dividend distribution tax and fringe benefit tax.
The revenue foregone statement pertaining to corporate taxes also throws a few other interesting trends.
Service Sector Pays More
Contradictory to popular belief that service companies pay less tax, the effective tax rate of service companies at 23.6 per cent was marginally higher than the 21.9 per cent rate paid by the manufacturing industries in FY-09.
However, not all service sectors shell out more cash for taxes. IT-enabled service and BPO sectors, for instance, enjoy effective rates as low as 13.1 per cent and 11.8 per cent respectively.
However, a good number of large software companies have moved out of the low-tax regimes to contribute more to the tax kitty.
The sector classification in the statement suggests that about 50 per cent of the 74 industries listed out pay an effective corporate tax rate of higher than 25 per cent.
But which are the industries that do not really result in much revenue loss for the Government?
Tyres, commission agents, professionals such as auditors and lawyers, beauty parlours, security agencies, banks, advertisement agencies and entertainment providers are among those sectors whose effective tax rate is 30 per cent or more – close to the statutory rate.
Others such as textiles, property developers, forest contractors, leasing companies and software development agencies pay less than 15 per cent of their profits as taxes.
