THE GIST of Editorial for UPSC Exams : 31 October 2019 (Cut in the corporate tax rates (Mint))

Cut in the corporate tax rates (Mint)

Mains Paper 3 : Economy
Prelims level : Corporate income tax
Mains level : Reasons behind corporate income tax cut

Context

• The changes in corporate income tax (CIT) constitute an important milestone in India’s recent legacy of tax reforms, aimed at lowering tax rates and broadening tax bases. In 2015-16, the then Finance Minister announced that the basic CIT rate would be reduced to 25 per cent but action on this was slow. The latest reforms go beyond this by lowering the basic rate to 22 % for domestic companies and 15 % for new manufacturing companies. The cess and surcharges will however continue.
• The effective tax rate linked to the basic tax rate of 22 % is 25.17 %. While availing this lower rate, the companies will have to forego the benefits of any tax exemptions and deductions.
• Also under the new corporate tax policy, new companies that set up manufacturing facilities in India starting in October and commencing production before the end of March, 2023 will be taxed at an effective rate of 17%.

Need for the Cut

• The corporate tax cut is part of a series of steps taken by the government to tackle the slowdown in economic growth, which has dropped for five consecutive quarters to 5% in the June quarter.
• Investor sentiment had taken a hit by the additional taxes that were announced by the government during the budget in July and began pulling money out of the country.
• Moreover, corporate taxes in India were significantly higher than East Asian economies, which acted as a barrier in attracting investors in the country.

Impact of the Cut

• Tax cuts, by putting more money in the hands of private sector, can offer people more incentive to produce and contribute to the economy. Thus, the present tax cut can help widen the economy.
• Investments crucially depend on the consumption levels in an economy. If there is high consumer demand, firms would eagerly invest. However, if the consumption level is depressed because incomes are low across the board and companies have high unsold inventories, the impact on fresh investments would be muted.
• The corporate tax rate is also a major determinant of how investors allocate capital across various economies. Hence, the present cut can help in increasing India’s global competitiveness.
• In the medium to long term, the tax cut is expected to boost investments and increase the productive capacity of the economy. As regardless of a slump in demand in the short term, investment decisions are taken after considering long term demand projections.
• The tax cut, however, is expected to cause a yearly revenue loss of ₹1.45 lakh crore to the
  government which is struggling to meet its fiscal deficit target. This has the potential to further depress
  the economy as the government could use the same money to create new productive assets.

Conclusion

• Nevertheless, if the cuts manage to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue. Further, a considerable portion of the tax foregone will come back to the government via the dividends that public sector firms may announce as they too would pay lower taxes.
• Also, the spike in stock markets and the overall business sentiment would likely mean that the government will earn more from disinvestment. However, the government will also need to simultaneously enact along with these tax cuts other structural reforms that reduce entry barriers in the economy and make the marketplace more competitive.

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Prelims Questions:

Q.1) With reference to theState Election Commissioner, consider the following statements:
1. State Election Commissioner shall be appointed by the President of India.
2. The State Election Commissioner shall not be removed from his office except in like manner and on the like ground as a Judge of a High Court.

Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both
D. None

Answer: B
Mains Questions:
Q.1) By continuing with its series of reforms, the government has announced a significant cut in the corporate tax rates. What will be the impact of the tax cut on the overall economy?