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Corporation Tax Cut

The announcement of reduction in the corporate tax rates received positive response in the stock markets.

Which are the steps taken by the Government so far?

1. The markets have kept the surcharges on high incomes from foreign portfolio investors (FPIs).

2. It has liberalized investments in single-brand retail.

3. It has opened up coal mining for 100% foreign investment.

4. There has been a consolidation of public sector banks.

What is the best practice for tax reform?

1. The tax base must be broadened, and the rate of tax be reduced.

2. This is important for corporate income tax because capital has footloose mobility and can easily migrate in search of a lower tax regime, with other conditions remaining the same.

Why are tax concessions not preferred?

1. The government decided to cut the tax rate to 22% conditional on the companies not availing tax concessions.

2. There were transitional issues to decide on the eligibility and issues of aligning the tax on small businesses that paid at much higher individual income tax rates.

3. Reduction in Minimum Alternate Tax from 18% to 15% doesn’t help much in achieving the objective of broadening the tax base.

4. The costs of tax concessions in terms of revenue foregone and unintended distortions are high, and their efficacy in achieving the objectives is doubtful.

How were the tax rates structured in previously?

1. Prior to the tax cut, the nominal tax rate including the cess and surcharge was 35%.

2. The effective rate was lower at 29.49% in 2017–18.

3. The corporate tax collection was estimated at ₹ 7,66,000 crore.

4. The loss due to the lower rate of 22% is around ₹ 1.12 lakh crore.

5. The new companies whose rate has been cut down to 15% will not be able to avail the benefit until they earn profits.

6. As the tax projections for 2019–20 are overestimated, the actual loss may be less, but then the actual collections are also likely to be less.

Who bears the burden of tax cuts?

1. The burden of the tax cut is borne by the states.

2. The tax cut is on the basic rate and not on cess and surcharges, and according to the prevailing devolution formula, the loss to the states is estimated at₹ 60,000 crores.

3. Of the estimated loss of ₹ 82,000 crores to the Centre, almost ₹ 20,000 crore is likely to return to it by way of higher dividends from public sector enterprises as lower tax will increase their after-tax profits.

4. The fiscal situation for the states might be insecure next year as the overestimation in central tax collection might significantly erode the tax devolution requiring them to cut expenditures in an unplanned manner.

5. The slowing economy, particularly in the construction and real estate sectors might lower the growth of revenue from stamps and registration, only important own revenue source left for states.

Conclusion

The slowdown in the economy is real and not a cyclical phenomenon.

1. While the economic slowdown is because of slackening demand, effect of supply-side measures on investment revival has to be monitored.

2. The government will have to substantially forego its revenue to revive demand, but the need for reining in the fiscal deficit will be a restriction.

3. Even the enterprises are also pressurized to give away much of their profits by way of dividends, leaving very little for reinvestment.