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Taxes are cut: will the economy revive

If one does not know to which port one is sailing, no wind is favourable. The government sure knows the port that it must conquer. It has run the gauntlet and hopes to come victorious. The slashing of the corporate tax has all the moorings of a super pot-boiler. Now it is up to the entrepreneur to search for the change, respond to it and exploit the opportunities. Corporates will have more money with them to expand or pass on the benefits to the consumer. But the question is which side will they tilt?


Indian economic growth is plagued by low per capita income, huge dependence on agriculture, heavy population pressure, existence of chronic unemployment and under-employment, slow rate of capital formation, inequality in wealth distribution and poor quality of human capital. The drop in GDP, the economic slowdown and the job losses spurred the government to come out with a very bold fix, even settling for a 1.45 lakh Crore hit in revenue each year. The Corporates accounted for about 1.6 per cent of total taxpayers, for the assessment year 2017/18 but contributed over 55 per cent to income taxes during the same year, deeply testing the sustainability. What would happen if no corporate taxes were levied or were paid? Profits would not be taxed, resulting in high-income people deferring paying personal income taxes on much of their income indefinitely. This would make corporations retain their profits and reinvest them, rather than pay dividends.


Both private and public companies registered in India under the Companies Act 1956, pay corporate tax on the total income. A surcharge at the rate of 5% is levied further, if net income is in the range of Rs 1 crore to Rs 10 crore and rises to 10% if the net income exceeds Rs 10 cr, Education cess of 3% is levied on the sum of income tax and surcharge irrespective of the level of net income, breaking the proverbial camel’s back. Royalty received by foreign companies are also subject to tax at the rate of 50% with surcharges to boot. It makes sense to bring down the tax rates on corporates since they are essential building blocks of economy and have more financial resources than small firms to conduct research and develop new goods. Since they generally offer more varied job opportunities and greater job stability, higher wages, and better health and retirement benefits they influence the feel-good factor in the society.


Weaving a magic wand, the Centre slashed effective corporate tax to 25.17%, inclusive of all cess and surcharges, for domestic companies that will be close to the global average applicable from 1st April. It virtualises the effective statutory rate for corporate tax at 22 per cent, down from 30%. For the current year, KPMG data shows that the statutory tax rate in Myanmar is 25%, in Malaysia, it is 24%, in Indonesia and Korea 25% and Sri Lanka 28%. Even Chinese companies pay a tax of 25% and Brazil pays 34%. The global average corporate tax rate is 23.79% now, and the Asian average is 21.09%, making businesses in Asia profitable. Will this move raise the economy? The government too would need to spend a lot more that would create jobs for the masses. The affordable housing push and the Smart Cities Mission must be aggressively pushed to drive the demand. But how does it do this, given the precarious fiscal position?


Slashing taxes has a flip side. In as much as they incentivise large corporates to progress to becoming multinationals, bringing in more wealth and their inward investments creating much needed foreign currency, they also tend to avoid tax, monopolise, leading to higher prices for the consumers and lower wages for workers, rendering smaller firms struggle to compete. There are several major ways the corporations use or manage to earn tax subsidies. One way is by shifting profits to foreign subsidiaries in countries with lower tax rates, also known as offshore tax sheltering. Another way is through the use of accelerated depreciation. The laws need to be both enabling and restrictive if the big revenue loss is not to dent the spending on welfare schemes.


Manufacturing accounts for over 16% of the Indian economy and employs 13% of the country’s workforce. Automobile and Construction sectors, which are also big employers, must recover fast in the next few months for the economy to swing upwards. Data released by the Society of Indian Automobile Manufacturers (SIAM) showed, around 2.30 lakh auto sector jobs lost while the sale of passenger cars in July 2019 fell 35 per cent compared to the same month last year.


All said and done, some out of box thinking is called for. Economy grows by promoting innovation start-ups for they are the ultimate job creators who start with ingenious ideas, take risks and create value. Millions of Rupees is spent in skilling, reskilling and upskilling. Skills must be institutionalised whether in education or in employment. All research shows the longer the unemployment payments, or dole outs or freebies stay, the longer the jobless stay jobless. A serious rethink is needed here. In the Medicare subsidies, incentivizing doctors must stop with only the cost of the drugs being reimbursed. Ambiguous and unclear laws must be trashed. Above all, the government must cut the deficits.


The larger question after the government’s push to fast lane economy is, will the corporates deliver?  In a depressed economy, when inflation is low, there is no incentive for the corporates to invest in fixed assets or create capacity. It is possible that much of the tax cut may go to savings rather than investments. Where does that leave the demand side of the economy? Unless people have the money to spend, or the prices are lowered, the demand does not pick up. The investors have profited in the past week from the government’s largesse. The rising stocks is sure to allow businesses to raise capital to pay off debt, launch new products and expand operations. But most importantly, will the common man in the value chain also cheer?

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