In this blog, the author has discussed that the corporate taxes which were slashed from 25% to 15% now will heavily boost the corporate sector in the future. A comparison has been drawn with the corporate taxes of other countries, in order to bring India into the competition forefront. Read on to know in details.
In one of the valiant steps undertaken by the government to give a boost to the economy as the virtual cycle that spurs growth in the economy has not been functioning as expected, it had issued an ordinance which was later added in the form of the amendment along with some other amendments to the Income tax act, 1961, that provides to reduce the corporate tax rate for companies. It is considered to be one of the greatest reforms taken by the government in the previous years for domestic industries and new manufacturing units by reducing the tax rate by 10% to 15%.[1]
So, this significant cut in corporate tax rates bought down the effective tax rate (including surcharge and cess) on corporations. With these new directives, certain domestic companies will need to pay only 22%, effectively 25.17%, including surcharge and cess (22% +10% +4%) which was earlier 34.94%[2] and in a move to encourage start-up, new domestic companies that had set up and registered manufacturing facilities in India on or after 1st October 2019 and commence manufacturing before the end of March 2023 will be taxed at the rate of 15%, effectively 17.16% including surcharge and cess (15% +10% +4%)[3]. But this is subject to the condition that they will not claim certain deductions and cannot set off losses carried forward attributable to such deductions for both the sectors and also they need not pay the minimum alternate tax (MAT). Furthermore, domestic manufacturing companies that had set up and registered manufacturing facilities in India on or after 1st March 2016 will be taxed at the rate of 25% plus surcharge if applicable and cess which was earlier 34.94% subject to the condition that they will not claim certain deductions.[4]
However, there is a dilemma whether to opt for lower corporate tax rates and increase profitability or pay higher taxes under current rates with the benefit of claiming deductions and set off losses carried forward attributable to such deductions. But this benefit of claiming deductions and set off losses is not available under the new tax slabs.[5] Hence, the extent of the impact of a new tax scheme for companies will depend on specific sectors and exemptions/ deductions that companies currently enjoy.
The corporate sector got a relief of close to 10 to 15 percentage points in the effective tax rate, including cess and surcharge, which had created euphoria in corporate India because it gave the opportunity to the companies to hold greater reserves and might also raise their languishing profit margins. The gains that will accrue to companies from the move, in turn, could be used in three ways. Companies could pump up the excess cash, back into their businesses by adding employees, going in for expansions, building new facilities and so on. Alternatively, they might choose to reward shareholders with higher dividends. But what is no doubt hoped for is that these companies, which include some of India's largest corporate, will pass on the benefits to consumers in the form of discounts on products-be they consumer goods, automobiles or homes. This, the government no doubt hopes will lead consumers /customers to shop again and move jammed wheels of the economy resulting in the growth of GDP.
It is also known that there is constant pressure on governments as the economy is under duress and also GDP tumbles in first quarter of the previous fiscal down from over 8 percent a year ago to 5 percent and the slowdown is visible in many sectors, such as automotive, real estate and FMCG (Fast Moving Consumable Goods). By lowering tax rate the government hopes that it can help boost economic growth and make India more competitive on the global stage by making Indian corporate tax rates at par with prevailing rates in countries all over the world.[6]
The government gives the special emphasis on investment as the Investment is important for enhancing productivity in the economy that eventually improves wages, creates job, enhances exports, so it is believed that the new lower tax rates will attract more foreign direct investments into the country and help revive the domestic manufacturing sector which has seen lacklustre growth. And, the lower tax outflow could increase the share of profit-making by those companies in India over time.
Contrary to the above discussion, this step taken by the government is expected to cause a yearly revenue loss of ₹1.45 lakh crore which costs to the exchequer amounts to 0.7 percent of GDP, while the GDP gain to the government, as a result, will be just 0.2 per cent which is already struggling to meet its fiscal deficit target. An HSBC research note projects that GDP growth for fiscal 2019-20 will increase from 5.7 percent to 5.9 percent. The central government's fiscal deficit will rise from the budgeted estimate of 3.3 percent to 3.7 percent of the GDP (higher than HSBC's previous assumption of 3.5 percent). But, at the same time, if it manages to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue.
India's move to cut corporate tax rates was a "credit negative development" despite potentially boosting the economy as it will widen its fiscal deficit as said by S&P Global Ratings.
There is also a view that the present tax rate cut is simply a concession to corporate houses rather than as a structural reform that could boost the wider economy. They believe that the current economic slowdown is due to the problem of insufficient demand which cannot be addressed just through tax cuts and instead advocate greater government spending to boost the economy.
Footnotes [1] Prashanth Perumal, The Hindu Explains | What corporate tax cut means for the Indian economy, https://www.thehindu.com/business/Economy/the-hindu-explains-what-corporate-tax-cut-means-for-the-indian-economy/article29470498.ece [2] Sec 115BAA of Income tax act, 1961 [3] Sec 115BAB of Income tax act, 1961 [4] Sec 115BA of Income tax act, 1961 [5] Sachin Dave, Corporate tax cut – Issue of carrying forward losses vexes companies in red , https://economictimes.indiatimes.com/news/economy/policy/corporate-tax-cut-issue-of-carrying-forwardlosses-vexes-companies-in-red/articleshow/71321427.cms [6]MG Arun, Why corporate tax cuts may not bring down consumer prices (much), https://www.indiatoday.in/india-today-insight/story/corporate-tax-cut-consumer-price-1602907-2019-09-25
Submitted by,
Piyush Agrawal & Radhika Agrawal,
Hidayatullah National Law University.
(Image used for representational purpose only.)