Mirage of a cut
Santosh Kumar Mohapatra
The decision of the government to cut corporate tax rate is being hailed as a big structural reform. It was dubbed as the most significant corporate tax reform after GST, and described as a bold move by economists and corporate honchos. But a bold decision is one that taxes the rich at a higher rate.
An argument favouring corporate tax cut was that India had the highest statutory tax rate of 48.3 per cent in 2018. In reality, this rate included dividend distribution tax (DDT). Companies with excess cash on their balance sheet are buying back shares rather than paying out the same via dividends and to avoid paying DDT. Finance Minister Nirmala Sitharaman had plugged this loophole by taxing buybacks at 20 per cent rate of interest, similar to those applicable on unlisted companies. But now, there will be no tax on buyback of shares by listed companies that announced buyback plans before July 5.
The government has not only cut corporate tax but also removed minimum alternate tax (MAT) for companies that do not avail exemptions and incentives. A higher surcharge, announced in the Budget in July, will now not be applicable to capital gains on sale of equity made by foreign portfolio investors (FPIs) as well as individuals and other classes of investors.
There was no need for corporate tax cut in India as effective tax rate is low at about 23 per cent owing to a slew of exemptions and tax holidays that companies have been enjoying. Further, corporates are responsible for the rise in NPAs, banking frauds and taxes forgone. The government's revenue forgone as incentives and tax exemptions to corporates is growing every year. In 2018-19, it grew 16 per cent to more than Rs 1,08,785 crore from Rs 93,642.50 crore the previous fiscal. In disputes related to direct taxes, corporate taxes account for Rs 4 lakh crore. The FM has said that new tax rate will be applicable to companies that do not avail any exemption or incentive. In practice, though, they will find adequate tax loopholes to avail exemptions or incentives.
It is true that in 1980, corporate tax rates around the world averaged 38.84 per cent and it has been reduced to average of 23.03 per cent now. The reason is not people's welfare but free market being taken over by crony capitalism and corporate welfare cheats
It may be noted that the government has promised to lower corporate tax rate to 25 per cent for all companies once GST mop-up improves. But the cut has come when there is a fall in GST and direct tax collection. Now, with corporate tax cut, the government will have to bear an additional loss of Rs 1.45 lakh crore, which will trigger fiscal slippage.
Smaller companies need tax cuts, given that their effective tax rate was higher than those of bigger companies. The recent cut would benefit only 0.7 per cent of corporates in the country. The top 1,000 companies listed on the NSE can save Rs 65,000 crore from the corporate tax cuts. Now smaller companies will face intense competition to survive. The government's move is based on a clandestine design to appease corporate honchos.
It was argued before the latest corporate tax cut that the move will bring the country's corporate tax rate closer to the global average. India, now has one of the lowest corporate tax rates in the world. The new effective corporate income tax rates of 25.17 per cent in India will be lower than effective tax rate of USA (27 per cent), Japan (30.62 per cent), Brazil (34 per cent), and Germany (30 per cent) and is similar to China (25 per cent) and Korea (25 per cent).
It is true that in 1980, corporate tax rates around the world averaged 38.84 per cent and it has been reduced to average of 23.03 per cent now. The reason is not people's welfare but free market being taken over by crony capitalism and corporate welfare cheats. Various governments have been browbeaten by corporate behemoths, financial oligarchy to reduce tax. They create trepidation of engineering stock market collapse.
In a bid to compensate for revenue losses from corporate tax rate cuts, the Centre is working on a three-pronged strategy: fast-track monetisation of idle state-owned land, make strategic stake sale in key companies, and sell residual stake in other state-run firms. The government has upped disinvestment targets from Rs 1.05 lakh crore to Rs 1.57 lakh crore this fiscal, and also decided to extort Rs 1.76 lakh crore from RBI reserves. Those steps will reduce scope to raise resources. Corporate tax cut will also have serious repercussions on state finances as their share will fall proportionally from divisible pools.
The cut in corporate tax will enhance the wealth of corporates. In the absence of demand, the corporates will transfer profits to tax havens to avoid taxes; otherwise they will buy back shares as was seen in America.
The tax cut policy is part of trickle-down economics. It has failed to stimulate growth and has triggered severe inequality as pointed out by an IMF report. Inequality reduces growth as the propensity to consume out of income is higher for people than for corporates. The argument that corporate tax cut will rekindle private investments and attract foreign investments in the country is absolutely wrong. In the past, such reduction has failed to spur investment. Private investment depends on effective demand linked to purchasing power of people. The current crisis arises from low demand.
Only an increase in purchasing power of people can spur demand and not repo rate cut or tax cut. The government should create more jobs, invest more in social and infrastructure sector, and reduce indirect taxes on goods and services of mass consumption. It can generate taxes by imposing wealth tax on billionaires. Foreign investment has both positive and negative contribution. Hence, the government should enhance savings, which can spur investment and growth. Instead of maximising profits and socialising losses, corporate should think that they have got some responsibility to nation.
The writer is an Odisha-based economist. e-Mail: email@example.com.