In a bid to counter the ongoing slowdown in the economy the Indian finance minister took a
slew of measures, in sectors ranging from housing to exports. One such profound reform
was reducing the corporate tax rate (CTR) to 22% for all existing companies and to 15% for
new manufacturing units, being set up on or after Oct 1, 2019 and commencing operations
before March 31, 2023. The minimum alternate tax (MAT) was also cut to 15% from 18.5%
earlier. With this, the effective tax rate(ETR) for most of the companies, after incorporating
a surcharge of 10% and cess of 4%, becomes 25.168% and for the new units it comes down
to 17.01%.
On 20 th September 2019, the Government of India introduced Taxation (Amendment)
Ordinance 2019 to insert section 115BAA in the Income Tax Act 1961. The objective of this
move was to enable the companies save more cash in hand, which ultimately would be
invested in the country, producing more jobs and stimulating the economy. The move is also
aimed at gaining attention of the foreign investors who are exiting China in the wake of US-
China trade tensions and looking to set up their manufacturing units in other Asian
countries. Earlier with the base CTR of 30%, India was at a serious disadvantage to its Asian
counterparts as most of them had their CTR in the range of 20%-30%, with Singapore having
it as low as 17% [1] . Now with 22%, it stands in line with the prospective manufacturing
destinations. Interestingly, the government’s choice of the ETR of 25% is perhaps more
thought of than many could have guessed. As per OECD’s comparison of the ETR of various
countries with respect to their tax collections, the Laffer curve so formed, in which India
used to be clearly off the chart, peaks at somewhere around 25% [2] . This would, at least
theoretically, mean a boost in the federal tax collections in coming years.
Besides the merits, the drawbacks of the move aren’t ignorable for sure. First and foremost,
as the finance minister pointed out, it is expected to cause a revenue loss of around Rs 1.45
lakh crore, which is a good 19% of Rs 7.66 lakh crore corporate tax collections budgeted for
FY20. This is huge as already due to slowdown, the direct as well as indirect tax collections
have been hurt and the government seems missing the fiscal discipline. Secondly, since it is
a demand-led slowdown, critics worry that the industrialists may not start investing the
additional revenue right away and would rather wait for the demand to pick up to. Similar
instance has been noted in the past, when President Trump lowered the taxes in US and
expected the household savings to go up. But what actually transpired is not a secret. And
last but not the least, with a considerable difference between the CTR and highest effective
income tax rate (around 42%), the chances of tax evasion through corporatization have
arisen like never before.
Time will best judge whether this move will be beneficial or not. But it’s certainly one of the
biggest reforms in Indian economic history after 1991, which is going to shape the future of
the country in many dimensions. Perhaps this is one of the best examples of “structural
reform” that the public has been demanding lately to counter the ongoing slowdown.
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