Are you an accountant or in any way related to it and or interested in exploring the world of finance and taxes? Have you ever heard about the term “corporate taxations”? What type of tax is that? How is it levied? Do not these questions swirl around you in mind? What purpose does it serve? These types of questions would hit hard on your mind if you are a finance, accountancy, or business administration student. Today, I am here to explain the term and the purpose it serves.
Following is a stepwise guide to its understanding:
Simply stating that a Corporate Business Tax is defined as tax levied on business profits. In other words, just as an individual's income is taxed under the term of INCOME TAX. Similarly, the income/profits of the businesses are subjected to a tax called Corporate Business Tax.
To quote the US Judge Oliver Wendell Holmes Jr.: "Taxes are what we pay for civilized society." Businesses and firms require a healthy and tax compliant society to pay taxes regarding the corporate business tax. In addition to it, a country's tax system or a state should be designed and crafted as pro-growth and incentive-oriented to allow inflow of investment and growth in the long run. Corporate tax has been discussed with varying degrees of intensity since the advent of the corporate income tax in 1909.
To Tax Businesses or Not?
The foremost question regarding businesses that keeps on bothering the Economists, business administrators, managers, and policymakers is whether or not to tax business?
After years of brainstorming and there have emerged two schools of thought:
Some advocate that a corporate tax is a kind of distortive tax; it affects and minimizes the profitability of a firm or company; therefore, it should be kept to a minimum or even eliminated. In contrast to this popular opinion, another school of thought is that Multinational companies are often tax evasion despite their heavy profitability. Despite this, it is evident that businesses benefit from the infrastructure of a country and owe them.
Do corporate business tax rates matter?
This is one of the burning issues to be dealt with regarding the corporate taxes rates. Keeping tax rates reasonable can lead to the development and robust growth of business and private funding.
Reasonable tax rates are significant and affect small and medium-sized enterprises, playing a crucial role in economic growth and employment. A decision to impose heavy tax on small and medium enterprises may not contribute much to the government's exchequer. Still, it might cause businesses to move to the informal sector or, even worse, cease operations.
For instance, in Brazil, the government created Simples Nacional, a tax regime designed to simplify the collection of taxes for micro and small enterprises. The program reduced overall tax costs by 8%. It contributed to an increase of 11.6% in the business licensing rate, a 6.3% increase in the registration of microenterprises, and a 7.2% increase in the number of firms registered with the tax authority. Revenue collections rose by 7.4% percent as a result of increased tax payments and social security contributions. Simples Nacional was also credited with increasing the revenue, profit, paid employment and fixed capital of formal-sector firms.
While the amount of the tax cost for businesses matters for investment and growth. Especially when taxes are high, businesses are more inclined to opt-out of the formal sector.
This should be kept in mind that businesses shall always care about what they get for their taxes. For them, the provision of quality infrastructure is critical for the sound functioning of an economy because it plays such a central role in determining the location of economic activity and the kinds of sectors that can develop. A capable and efficient workforce is key to an economy's competitiveness and productivity. Also, investing in the provision of health services is essential for both economic and moral reasons. Also, it has become mandatory by law for multinational firms and corporations to spend 2&'' percent of their income on the environment they live in, which is called Corporate Social Responsibility.
Other than that, an educated workforce increases the overall efficiency, develops trust among the workers and employees with the management, and allows companies to move up the value chain beyond simple production processes and products.
Significant Benefits of Corporate Business Tax
It should be noted that the levy of corporate business tax serves three essential functions. First, it helps in raising revenue for the government.
Second, the corporate business tax contributes to the overall progressivity of the tax system to the extent that the corporate tax burden falls on capital. Therefore, it is to conclude that corporate income tax contributes at large to the progressivity of the overall tax system.
Third, the corporate income tax serves as a backstop to the individual income tax because it precludes using the corporation as a tax shelter for high-income taxpayers.
Corporate Business Taxation serves as a very crucial tool of economic policymaking. It should be used in due consultation with all the stakeholders and policymakers to foster economic growth and a business-friendly environment. In addition to it, it can guide along the route of robust economic growth if pursued with plausible decision making and consensus.