India Inc’s clamour for another tax rate cut isn’t justified

| Updated on December 20, 2019

Seeking another rate-cut — even staggered over three years — is inappropriate both in terms of timing and economic rationale.

Even before the ink has dried on the government’s decision to reduce corporate tax, India Inc has begun clamouring for another steep cut. At the pre-Budget meeting held on Thursday, it sought a uniform corporate tax rate of 15 per cent for all companies, existing and new, on the grounds that the differential rate created an ‘inequality’. India Inc’s concern for inequality in their tax rate, in a country where the richest 1 per cent garnered 73 per cent of the wealth created in 2017, is indeed amusing. This ‘inequality’ should be viewed in the context of two major compulsions that the government faced. It desperately needed the industry to invest heavily in the economy which is in the midst of a deep slowdown. To get that to happen, it felt persuaded to reduce corporate tax rate to levels that are competitive around the world. At the same time, the government did not have fiscal space for an across the board reduction. Hence it chose a middle path and cut rates from 30 per cent to 22 per cent for existing companies and introduced a lower 15 per cent rate for new companies with an eye on attracting manufacturing investments including those looking at setting up bases outside China on account of its trade war with the US.

The government chose corporate tax rate cut over the more populist income tax rate cut because it wanted private investment in the economy to revive, which in turn would boost growth and create employment. Things have only got worse between the tax cut in September and now. In the second quarter of FY20, the economic growth slowed to 4.5 per cent of GDP, the lowest in 26 quarters. Core sector performance is down with six out of eight sectors in the red. And the investment rate in the economy at 27.6 per cent is the lowest in 11 quarters. While it is a bit early to expect India Inc to start investing heavily considering the excess capacity in the system, it has been quick to take advantage of the announcement. Direct tax mop-up in October is already lower by 17.5 per cent. But there is no evidence that it has passed on this benefit either to its shareholders as higher dividend or its customers through lower prices for its products/services. Doing so would have left more money in the hands of the consumers and boosted demand.

The compulsions that forced the government to adopt dual rates not only remain but have intensified. India Inc is yet to deliver its part of the bargain. Seeking another rate-cut — even staggered over three years — in such a situation is inappropriate, both in terms of timing and economic rationale.

Published on December 20, 2019

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