Deepening inequality with the current tax reform

India’s slumping economic growth has forced the Indian Government to relax its strict fiscal deficit targets.

Finance Minister Nirmala Sitharaman on September 20, 2019, announced that there will be a reduction in the country’s effective corporate tax rate from 35% to 25%. Making the announcement, Finance Minister Nirmala Sitharaman said the new tax rate will be applicable from the current fiscal which began on April 1 and for the companies that do not avail of any other incentive or commission, the effective tax rate would be just 22%. However, the actual comparison should take place with the effective tax rate since this is the real tax that the corporates actually pay after deducting exemption claims and adding surcharges, cess and others. The effective tax rate paid by companies is around 29% for the year 2018 - 19.

So technically, it is a gain of 4% as per this announcement, but as a corporate, you will have to drop all exemptions in order to avail of the new tax rate. Also, the manufacturing firms that were incorporated after October will be taxed at 15% instead of 25%. 

Effect on People

The idea behind the reduction is to boost the commercial scenario in India. The conditions of the manufacturing industry are expected to improve and it is expected that employees will be benefitted from this change. The Corporate Tax rate is also a major determinant for investments, both foreign and domestic and a low corporate tax rate can provide a significant boost to the economy as well as putting India on a globally competitive scale.

Effect on the Government

For the Government, this huge tax cut may mean an estimated annual loss of approximately INR 1.45 lakh crore. However, the government plans to revive the same when the economy grows. The slowing growth rate puts the regulator in a situation where easing corporate structures will lead to healthy cash flow. This reduction in taxes is a big step that the honorable Finance Minister has to take and could prove to be a huge gamble for the government as this costs the government a lot and will only be deliverable if the government is able to deliver on the rest of its reforms. The government must be able to create higher demand and higher purchasing power amongst the masses to bridge the gap of the deficit.

This may also have adverse effects as the production may increase due to the reduction of taxes, however, the demand still remains the same. The consumption has already fallen significantly with no direct action on the income tax. Some economists have even shown concerns on the slowdown and said that it cannot be solved by corporate tax reforms and would require much higher spend from the government’s side. Tax experts share their views differently on the topic. Connect with a few tax experts here to find out more about the same

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