Global Economy

View: Tax cuts are good news but not enough to reverse slowdown


Readers should recall a tale from their childhood while debating the corporate tax rate. Once a wolf found itself with a bone stuck in its throat that no amount of huffing or puffing or gagging could bring out.

It pleaded for help and a crane came to its rescue. The crane put its beak into the wolf ’s gaping mouth, thrust it all the way down into the throat and pulled the obstruction out. As the wolf began to walk away without a backward glance at the crane, the bird exclaimed, “Not even a word of thanks, leave alone a reward!” At this, the wolf turned around and said, “Look, you’d put your head into my mouth, you should thank me for not biting it off.” The government expects the industry to be grateful that it has graciously reduced the corporate tax rate.

OECD, the club of rich countries, does many useful statistical services, one of which is compiling data on taxes among the major nations of the world. India has the distinction of having the highest rate of corporate tax in the world: 48.3% before the latest reform, including the tax a company pays on the dividends it distributes. Ideally, dividends should be taxed in the hands of the shareholder.

Over three-fifths (58 jurisdictions) of the 94 in the OECD database had statutory tax rates greater than or equal to 30% in 2000; it was less than one-fifth (18 jurisdictions) in 2018.

The general trend around the world has been to bring down the burden of corporate tax. In India, the effective tax rate went up from 23.22% in 2013-14, the last full year for which the UPA managed the fisc, to 29.49% for 2017-18, and even higher today, before the tax cuts. The latest announcement brings the rate down to 25.17%, still higher than the level in 2013-14, not counting the dividend distribution tax, which went up from 10% to 15%.

The revenue from corporate tax was 3.56% of GDP in India for 2018-19. The share of direct taxes, including personal income tax, was 6.4% of GDP. Regressive indirect taxes still account for more than 60% of all tax collections in India, including by the states.

A tax is called direct or indirect, depending on whether the taxpayer can shift the tax to someone else. If you have to pay income tax at the rate of 30% plus surcharge, if any, you have to pay it, you cannot make anyone else bear the tax. In the case of taxes on commodities, customs duty or GST, the tax is levied on the seller but it is passed down the chain of sales till it reaches the end consumer, who ends up bearing the tax.

Mukesh Ambani and his driver pay the same amount of tax when each buys a box of matches. Indirect taxes will take up a larger share of the disposable income of the poor than it will of the rich. That is why these taxes are regressive and should be a lesser source of revenue than direct taxes, whose higher marginal rates on higher incomes have an element of progressivity built-in.

However, corporate tax is non-transferable only in a formal sense. Companies look for a post-tax rate of return. They can calibrate their pricing to take into account a high rate of corporate tax, thereby passing on the burden of high corporate tax to the consumer. The only way this can be prevented is if the market is very competitive, eliminating the luxury of raising prices above the competition. In India, thanks to high levels of protection, which has steadily gone up under this government, it is entirely possible to pass on the burden of high tax to consumers by raising prices, in a variety of goods and services.

Therefore, it makes sense to have low, uniform rates of import duty, and low rates of corporate tax comparable to those in other, similarly placed economies. The statutory rate is 20% in a number of Asian countries, 17% in Singapore, although it is 25% in China, without taking into account various allowances that would be available to bring the effective rate of tax down.

The most exciting part of the new tax proposals is the lowering of the tax rate to 15% (effectively 17.01%) for manufacturing companies incorporated after October 1, 2019. But why limit this to manufacturing companies, when the share of services is gaining ground in the economy with every passing day? John Deere, American tractor maker, has so much software in its machines now that it argues that when it sells a tractor, it is effectively licensing use of that tractor and does not part with the authority to carry out repairs, which it says cannot be left to anyone but its own engineers. If a tractor is a machine-as-aservice, what quite is manufacture? Should India’s tax structure look to the future or to other countries’ past, in which they made it to assorted manufacturing supply chains?

Will the tax cuts now suffice to reverse the ongoing economic slowdown? That calls for sustained investment. The loan melas that banks have been ordered to carry out (never mind the promise to make banks board-run) will put some purchasing power in rural hands. But for that to result in a sustained boom, investment in infrastructure must pick up. That calls for fixing the broken financial mediation mechanism — banks burdened by bad loans, tottering non-banking financial companies and a dysfunctional debt market — and for the government to start releasing payment for the work done for it, besides a new, healthy model of public-private-partnership in big projects. Tax cuts are good news, but hold on a bit before you start jumping for joy.





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