The Shifting of corporation income tax in India : 1950-1965

Abstract

The purpose of this study is to determine empirically the extent of the short?run shifting of the corporation income tax in India. To accomplish this, two single?equation models are developed, based on slight modifications of the two behavioural assumptions proposed by Professors Krzyzaniak and Musgrave (01). The behavioural implications underlying these models amount to the recognition that the firm attempts to recover the tax burden of a year in the subsequent year. In other words, it is hypothesized that the entrepreneurial adjustments to a change in the tax rate are not instantaneous and there exists at least a lag of one?period time between the rise in the tax rate and the counteraction (of increasing prices) taken by the firms. This appears to be a more realistic assumption than that of KMS’s presumed instantaneous adjustments since corporation income tax is actually an appropriation of profits and, hence, cannot be added as a cost in the same year. The two equations thus developed are estimated with the Ordinary Least Squares technique. The regression coefficients of the tax variables thereby obtained are translated into the measures of the degrees of shifting. Empirical analysis of this study is conducted on both aggregative data and disaggregative data. To examine the efficacy of the proposed models for industry?wise data, the results of one of the regulated industries (Electricity Generation and Supply) are taken as the benchmark. Since an important factor in deciding the reliability of the shifting estimates is the ability of the non?tax factors to provide an estimate of the position in the absence of the tax, it is necessary to look at the overall performance of the proposed models before discussing shifting measures. Viewed from this angle, the empirical results of this study reveal that: (i) The explanatory powers of the proposed models for aggregative data are very high. For this data, the R² values of Models A and B are of the orders of 0.9328 and 0.9498 respectively; all the explanatory variables (other than the tax variable) are found to be significant at the 5 per cent level, with expected signs; and the OLS residuals of both Models A and B are found to satisfy all the assumptions made on the stochastic variable u. (ii) In the case of the benchmark (Electricity Generation and Supply) industry, the R² has attained values of the orders of 0.8860 and 0.8844 for Models A and B, respectively; with the exception of the inventory variable, all non?tax variables are found to be statistically significant at the 5 per cent level and possessing the expected signs. Further, the insignificance of the V variable is presumed to be the result of the statistical property of the data. (iii) In the case of industry?wise analysis, out of the twenty?two cases examined, Model A revealed more than 80 per cent variation in the chosen indicator of shifting for seventeen industries, while for Model B such a high explanation has been attained for fifteen cases. Further, in all the twenty?two cases (with the exception of Iron and Steel) the OLS residuals are found to satisfy all the assumptions made on the stochastic variable u. The main findings of this study are: (i) The empirical results of the aggregative data for both the hypothesized models of corporate behaviour towards short?run shifting of the corporation income tax suggest the acceptance of the time?old traditional belief of zero shifting. The shifting estimates of Models A and B with this data have worked out to be of the orders of ?0.5408 and ?1.0578, having standard errors of the orders of 0.2548 and 0.3440, respectively. (ii) The empirical results of both the models pursued in this study for the case of a regulated industry are consistent. For the chosen regulated industry in the Indian set?up, a model should result in zero shifting. For this data the shifting estimates of Models A and B have worked out to be of the orders of ?0.1750 and ?0.1953 while their standard errors were of the orders of 0.2363 and 0.3138, respectively. These results indicate a near?zero shifting. In view of these results, the proposed models are deemed to be appropriate ones for the industry?wise data also. (iii) The empirical results of disaggregative data are not uniform. The degree of shifting varied from industry to industry for both the models. For Model A, of the twenty?two industries analysed, three are found to be plagued with the problem of multicollinearity and thereby confounding their results to draw valid inferences about their shifting measures. These industries are: (a) Transport Equipment; (b) Other Chemicals; and (c) Tobacco. Amongst the remaining nineteen industries, the tax coefficient (which incidentally coincided with the shifting measure) has turned out to be positively significant at the 5 per cent level in seven cases, viz., Electrical Machinery, Machinery, Basic Chemicals, Medicines, Pottery, Coffee Plantations and Tea Plantations. Among these industries the degree of shifting is found to range from 50 per cent to 125 per cent. Further, the results of Model A of the present study reveal more than 100 per cent shifting for only one industry, viz., Medicines and Pharmaceuticals. For Model B, of the twenty industries examined, the results of five industries (viz., Iron and Steel, Medicines and Pharmaceuticals, Tobacco, Tea Plantations and Rubber Plantations) are confounded because of the multicollinearity problem. An examination of the remaining seventeen revealed that shifting was negligible or not statistically different from zero for twelve industries, and is significant for five industries. The degree of shifting of the latter five industries (Electrical Machinery, Machinery, Basic Chemicals, Pottery and Coffee Plantations) ranged from about 60 per cent to about 160 per cent. The results of this model reveal more than 100 per cent shifting in two cases, viz., Electrical Machinery and Basic Chemicals. The results of both models taken together reveal that the results of the present study are confounded because of multicollinearity in only one (Tobacco) case. In all the remaining cases, the results of one model could be supplemented with the other to draw positive inferences about the shiftability of corporation income tax at the disaggregative level. An interesting point worth noting here is that the degree of shifting estimated by Model B, in general, is always higher than that obtained with Model A. Based on the results of this study, it could therefore be concluded that the time?honoured traditionalists’ view on the short?run shifting of the corporation income tax is consistent with reality in the case of most of the Indian industries.