There is some indication that the cuts announced on Friday were part of the recommendations of a task force on direct taxes, which had not just recommended a cut in corporate taxes but a tweak in slabs for personal income tax too. Acting on one and not the other recommendation seemed rather cruel to the honest Indian. More so, because only a minuscule percentage of Indians pay any income tax at all and corporate taxes account for almost 60% of all direct taxes.
Girish Vanvari, Head Direct Tax at KPMG, said India is now following the global trend where countries like the USA and UK have higher personal income tax rates but lower corporate tax rates. “The world over – in USA, UK and Far East — corporate tax rates are going down and governments are encouraging companies to set up manufacturing and services so that more employment gets created. Personal tax rates are going up. US corporate tax rate is 21% while personal income tax is between 40-50%. In the UK, corporate tax rate is around 17% while personal income tax rate is between 40-50%. So we are following a global trend.”
Why Sitharaman may have found it tougher to tweak personal income tax rates could also be because very few of us pay any tax on income at all. In India, the tax: GDP ratio is just 11% while in the US, for example, it is 40%. So the government is focusing more on increased compliance to improve the tax-GDP ratio instead of slashing personal income tax rates. Besides, the logic is that reducing personal tax rates doesn’t create jobs.
After Friday morning’s announcements, the headline corporate tax rate has been reduced from 30% to 22%. This lowers the effective tax rate (after taking into account exemptions available earlier) to 25.17%, inclusive of all cesses and surcharges, from an effective tax rate of almost 35% earlier. That is a 10 percentage point reduction in taxes and brings India on par with other major South East Asian countries.
One cannot recall the last such massive cut in corporate tax rates, ever. For new domestic manufacturing companies incorporated after October one this year, corporate tax rate now stands at 15% without any exemptions and the effective rate would be 17.01% against 29.12% earlier, a reduction of 12 percentage points.
A caveat is that such companies should begin manufacturing by 2023. The FM has announced some other relief measures too for India Inc, including on capital gains and surcharges. The total revenue foregone through these announcements is Rs 1.45 lakh crore.
Despite several sectors lobbying hard for lower rates, the GST Council that held a meeting in Goa seemed to not really have agreed to revenue considerations of the Centre as well as the states. The only announcements made on Friday more than doubled the tax on caffeinated beverages and slashed tax on hotel tariffs and some goods.
So in effect, while corporate India gets a Diwali bonanza, the honest individual tax payer gets nothing and a decision on cutting GST rates may be a damp squib.
Meanwhile, the largesse shown by the government on Friday to India Inc also came in for sharp criticism from farmers.
Farmers suffered a loss of Rs 45-lakh cr between 2000 and 2017 on account of low realisation of output price. But its the Corporates which get a relief of Rs 1.45 lakh cr per yr by way of income tax reduction. No wonder the stock markets are happy, and so are the policy makers.— Devinder Sharma (@Devinder_Sharma) September 20, 2019
Agricultural policy expert Devinder Sharma said farmers suffered a loss of Rs 45 lakh crore between 2000 and 2017 on account of low realisation of output price. “But corporates get a relief of Rs 1.45 lakh crore per year by way of income tax reduction. No wonder the stock markets are happy and so are the policy makers.”
Another analyst said that while cutting corporate tax rates was a good move, this only addressed the investment slump in the economy and no measures had as yet been taken to revive demand. The corporate tax cut announced on Friday should put more money in the hands of companies, and they may then choose to not just deploy this sum back into business but also price cuts in some products. It is another matter that India Inc’s record of passing on cuts to consumers has been patchy at best – companies often have had to be reminded to even pass on frequent GST rate cuts in the past.
The corporate tax cuts are also expected to boost job creation, a big headache for the Modi government in its first tenure and continuing to be troublesome in the current one. Significant fiscal concerns too come to the fore after Friday’s announcements since they would mean Rs 1.45 lakh crore shaved off from the government’s annual revenues. This, when direct tax collections have already been growing at a pace far slower than budgeted for this fiscal.
Direct tax collections have grown by a mere five per cent till September 17. This means collections need to rise by over 27% in the remaining part of the year to meet the Budget projections of 17.3% growth rate, compared to actual collections in 2018-19. The government had set a direct tax collection target of Rs 13.35 lakh crore - Rs 7.66 lakh crore from corporation tax and Rs 5.69 lakh crore from personal income tax.
(The author is a senior journalist. Views are personal)