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India's climb to upper middle income status hinges on bulking of midsize companies

SEPTEMBER 27, 2022

By J B Mohapatra

THE defining characteristics of a company - perpetual existence, separate legal personality, limited liability of members, and freedom in transfer of shares - enabling a collective of individuals to operate under a common name for undertaking any lawful enterprise, holding property in its name and allowing distribution of beneficial interests in those enterprises among its members - have made it one of the most preferred routes for commercial association worldover. In India too, sustained initiatives for ensuring ease of operations, transparency, better corporate governance and reasonable regulatory measures through far-reaching administrative and legislative actions have created a conducive environment for small and medium businesses leading to accelerated pace of corporatisation and fresh incorporation. Legislative improvisations such as One Person Company (OPC) and Limited Liability Partnership (LLP) and move for a technology enabled ecosystem for ensuring ease of doing business and standardisation of processes have created the required momentum for faster corporatisation.

These efforts have translated to robust growth of new incorporation year on year; from 1.24 lakhs in 2018-19 to 1.22 lakhs in 2019-20, 1.55 lakhs in 2020-21 and 1.67 lakhs in 2021-22. As per Ministry of Corporate Affairs(MCA) Annual Report for 2021-22, a total of 22,48,969 companies have been registered as of 31-10-21, of which 14,29,166 companies were active companies comprising 13,59,605 private and 69,561 public companies. Three noticeable trends in incorporation are (a) a perceptible tilt to 'services' from 'manufacturing' in sectoral distribution (b) within 'services' the major bulk going under 'business services'. With the new helpful policies and infusion of large FDI to the sector, a causal connect is easily established in understanding the imperatives of incorporation in this sub-sector and (c) states with traditionally strong financial heft and improved policy and organisational set-up such as Maharashtra, Delhi, Tamilnadu, Telengana, Karnataka, West Bengal and Gujarat are leaders in incorporation of companies in their jurisdiction.

A fall-out of the larger incorporation is perceptible in growth of corporation tax in the overall direct tax collection. It was Rs 6.62 lakh cr out of overall Rs 11.18 lakh cr (59.21%) in 2018-19, Rs 5.56 lakh cr out of Rs 10.28 lakh cr (54%) in 2019-20, Rs 4.56 lakh cr out of Rs 9.24 lakh cr (49.3%) in 2020-21 and Rs 7.16 lakh cr out of Rs 14.09 lakh cr (50.81%) in 2021-22. The trend noticed in fresh incorporation numbers among states is again reverberated in disaggregated composition of corporation tax in the gross direct tax revenue in the state jurisdictions as well, as the numbers for 2021-22 show: from a range of 50-58% in Mumbai, Delhi, Chennai, Kolkota, Kanpur and Bhubaneswar to a range of 42-48% in Pune, Hyderabad, Ahmedabad, Chandigarh, Bhopal, Jaipur and Kochi, and a range of 30-37% in Patna, Nagpur, Guwahati to the lowest of 20% in Lucknow. Traditional and entrenched entrepreneurial excellence apart, it is undeniable that states who reengineered their own business processes in line with larger national policies, and recognised and conveyed the nuances of changes in the fiscal and regulatory laws and practices and economic potential of those changes to the business related ecosystem have either fortified their positions in the incorporation ladder or made positive forward moves towards corporatizing more numbers in their business se-up.

While number of gross corporate income tax return (ITR) filers have been steadily on the rise- from 9,10,150 in AY 2018-19, 9,63,918 in AY 2019-20, 9,43,397 in AY 2020-21 to 9,86,643 in AY 2021-22, the income range-wise distribution raises the familiar pattern as the following table shows:

Gross Total Income Range

AY 2018-19

AY 2019-20

AY 2020-21

Up to Rs 10 lakhs




Rs 10 to Rs 50 lakhs




Rs 50 lakhs to Rs 5 cr




Above Rs 5 cr




To say that configuration of Indian corporates is far too bottom heavy is stating the obvious. Even the percentage of corporates in the rung of income range from Rs 50 lakhs to Rs 5 cr is far too thin to spur any noticeable growth in productivity or profitability nor contribute meaningfully to any growth in corporate tax collection. Also lacking is that migration at scale of small corporates to higher rungs of income range. McKinsey Global Institute's report titled ' India's Turning Point: An Economic Agenda to Spur Growth and Jobs' (2000) alludes to the 'missing middle' of midsize corporates in India stating an undisputed fact that India has only about one half to two thirds as many midsize and large corporates as compared to other out performer emerging economies. Long term goals to augmentation of corporate tax depends much on scaling up in the number of midsize and large corporates through policy support and positive administrative intervention and also in wider corporatisation in regions and states which have under performed in generating fresh incorporation.

Matter of asymmetry between the number of companies incorporated as per annual reports of MCA and number of companies filing their ITR is equally evident in comparison of data of respective ministries, and would have a definite bearing on the overall gross corporate tax collection numbers. MCA has reported a total of 22,48,969 registered companies as of 31-10-2021 of which 14,29,166 are active comprising 13,59,605 private and 69,561 public companies. Even if the number of fresh incorporation of nearly 1,67,000 during 2021-22 is discounted, active incorporated companies should be in the range of 12 to 13 lakhs as on 31-3-21. As against which, ITR filing by companies for AY 2021-22 did not exceed 9.86 lakhs. Similar asymmetry exists for all previous years.

Statutory position with regard to filing of ITR by a taxpayer has provided a basic ceiling - 'when total income exceeds the maximum amount which is not chargeable to tax'- only in cases of individual, HUF, Association of Persons, Body of Individuals, Artificial Juridical Persons, charitable or religious trusts, political parties, and certain classes of associations and institutions. But in cases of companies and partnership firms including LLPs, there being no basic ceiling to determine obligation to file an ITR, it is but mandatory for every company to file its ITR no matter whether it is a case of loss or of income.

There, of course, are many variants of administrative measures or if need be suitable legislative formulations which can be worked out for a detailed gap analysis between the number of incorporated companies and ITRs filed by them, and to comprehensively address the non-filer cases among the companies. One could be triggering the e-verification scheme under section 135A of the Income Tax Act for determining the ITR filing status of specific cases. Second, since MCA has integrated its MCA 21 system for issue of PAN and TAN to a company, ITR filing status as an independent data field can be mapped on to MCA 21 for monitoring filing compliance at CBDT's level. Finally since legislations many times feed off and leverage upon each other's strength and speciality (as in the case of Representation of People's Act, 1951, whereby the Election Commission of India with powers vested in it under section 29(4) of that Act for any infraction in filing contribution report under section 29(3) by any political party can proceed to disentitle that political party from availing of any tax relief under the Income Tax Act ), dis-incentivising errant companies who fail to file ITR can also be considered under the legislative route through modification in the procedure or rules laid out in or under the terms of the Company's Act, 2013.

India's journey to an upper middle income country is inextricably connected with growing a much larger number of midsize and large companies who while being growth boosters to jobs and employment and leaders in technology and innovation, are equally cognizant of tax compliance requirements including the ITR filing and tax payment obligations as statutorily ordained.