As the budget is drawing near, the Confederation of Indian Industry urged the government recently to not only reduce corporate tax rate from the existing 35 per cent to 30 per cent, but also remove the surcharge of 2.5 per cent.

They also urged the government to bring farm income under the tax net. The CII is also asking for doing away with Minimum Alternate Tax so that corporates can pay equitable tax.

Since we Indians, always look to the west for inspiration, we tried to fish out how India Inc. compares with the US corporations in terms of taxes paid. Do Indian corporations pay abysmally high rates of taxes as compared to the developed countries?

The peak corporate tax in the United States is 35 per cent plus 5 per cent state tax, Japan stands at 42 per cent, Germany at 39.6 per cent and the United Kingdom at 30 per cent.

Among Asian counterparts, Korea has corporate tax rate of around 30 per cent. Looking at the above figures, it becomes clear that India Inc. tax rates compare well with most of the developed counterparts.

The trend among global economies (including India) over the last 15 years has been a consistent decline in the tax rates. So, there may be a case for bringing the corporate tax marginally down, but more or less India Inc. is in line with global peers.

But before we jump to any conclusions, let's find out how much did the top corporates actually pay as taxes (excluding deferred taxes) during FY04. Out of the BSE 30 companies, only 3 corporates -- ONGC, Tata Power and BPCL paid over 34 per cent as effective tax rate.

Overall, only 8 corporates paid taxes over 30 per cent. 14 companies effective tax rate was lesser than 20 per cent.

In effect, nearly half of the BSE 30 constituents paid below 20 per cent tax. The balance 8 companies paid between 20 per cent to 30 per cent as effective tax rate.

Of the Dow 30, 6 companies paid tax above 35 per cent in 2003, 13 companies' effective tax rate was between 20 per cent to 30 per cent and the rest 11 paid below 20 per cent tax.

The reason why half of the top India Inc. companies pay lesser than 20 per cent as tax is because they are either in the infrastructure sector or have set up plants in backward areas with tax exemptions.

That is perhaps why the CII is asking for doing away with MAT, as it will increase the tax contribution from India Inc.

But the anomaly becomes clear if we segregate these 30 companies, based on the segment they operate in, i.e. services, manufacturing and agriculture & allied. As per the Reserve Bank of India's FY03 revised estimates, services accounted for a lion's share (56%) of the GDP, agriculture contributed 22 per cent to GDP and the balance 22% came from manufacturing.

Of the BSE 30, 16 companies are from the manufacturing sector, 12 from the services and 2 (HLL and ITC) from the agri-allied sector.

Of the total profit before tax of Rs 561 bn earned by them in FY04, a huge 63 per cent was contributed by the manufacturing companies, which form only 22 per cent of GDP. Meanwhile, the 12 companies that represent the services sector (56 per cent of GDP) on the Sensex, contributed only 28% to the total profit before tax.

Of the total tax collected (Rs 14,000 crore), 67 per cent once again came from manufacturing companies. The services sector paid only 24 per cent of the total tax bill of BSE Sensex. There in lies the anomaly.

If we compare these stats with the Dow, the difference becomes even clearer. The Dow 30 companies are distributed equally between services and manufacturing i.e., 15 companies each from both sectors. Their contribution to the profit before tax and tax paid is also equitable, as seen in the table below.

Now it must be clear, why the finance ministry is looking at increasing tax quantum from the services sector. The aforesaid figures indicate that the services sector should gear itself for a higher tax liability going forward.