ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Weak Analytical Foundation

Corporate Tax Reductions

The claim of sharp reduction in effective corporate tax rate to 25.11% does not, in fact, represent any significant reduction in the tax burden that the companies bear at present, and hence, the fiscal instrument available for improvement in corporate investment gets blunted. Apart from frittering away the tax potential, this measure will shift the tax burden to individuals. Also, several non-manufacturing companies and a handful of large companies are likely to benefit from the measure.

 

Amongst the various measures initiated by the government since the middle of 2019 in response to the persistent depression in the domestic economy, the one that stands out as a radical reform measure is the reduction in the corporate tax rate. This drastic reduction in the tax rate falls into the structural adjustment policy framework which has propagated, inter alia, low tax rates with the elimination of tax incentives. Such a policy framework had its logic, if at all, for a period when the prevailing tax rates were usurious in character. Analytically, it is necessary to recognise that the present situation of tax incidences is radically different from the situation prevailing in the 1980s and 1990s when such reforms were propagated. For instance, earlier in the 1990s, the average statutory tax rates (STR) for the domestic companies was over 48% which was reduced to about 35% in the first decade of the new century (2003–04 to 2011–12; see Rajakumar 2014) and further to around 25% now. Such levels of moderate tax revenue mobilisation are obviously unavoidable for a developing economy like India’s which is in great need of higher levels of domestic saving and investment and concomitant public development programmes.

Against this background, one is not sure if the government has thought through the broader implications of the “loss of substantial revenue due to these measures,” as conceded by the union finance minister in her latest budget speech, or whether it was a knee-jerk reaction to a helpless economic situation. The budget’s inability to provide for a decisive upward thrust in development programmes under rural development or social expenditures, particularly for health, or its failure to provide for a push to overall public sector investment, reveal the adverse consequences of such heroic tax reform measures. With this broader macroeconomic perspective, this note confines itself to examining whether the nature of corporate tax reform has the potential to achieve its objectives of promoting growth and investment even in the medium term. After concluding that the scope for the measure to impart any such sizeable push to corporate investment and growth is limited, the note further explores the implications of the measure on government finances and also examines as to which of the corporate segments would benefit from such tax policies.

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Updated On : 9th Mar, 2020

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