Friday, April 10, 2020
Home Economy and Finance To promote growth, just cut tax rates: Here is the likely impact of tax...

To promote growth, just cut tax rates: Here is the likely impact of tax rates for corporates being slashed by the Modi govt

A likely outcome of these changes is that in the medium term we may see a swift expansion of non-farm employment opportunities for India which will reduce the burden on agriculture and have a positive impact on wages of both farm and non-farm labour.

Also Read

Karan Bhasin
Karan Bhasin is a political economist by training and has diversified research interests in the field of economics. He tweets @karanbhasin95.

Concerns on taxation front have persisted for a major part of the last two decades. Despite a series of reforms since then, we didn’t witness a big-bang direct tax reform and kept kicking the Direct Tax Code can into the future. The story wasn’t any different on the Goods and Service Tax. However, GST became a reality in the first tenure of Mr Modi and indeed, corporate tax rates were also reduced but the reduction was small, spread over years and it covered firms only till a turnover of Rs 250 crores.

The first budget of Modi 2.0 increased this limit to Rs 400 crores and this ensured that a bulk of Indian firms faced a corporate tax of 25 per cent with the relevant surcharges as applicable. Since then, the DTC report has been submitted and there have been talks of further lowering our corporate tax rates to a level comparable to some of our competitors. In a joint article with Dr Surjit Bhalla for the Indian Express, we arrived at a figure of 22 per cent as the optimal level of the corporate tax rate. The article can be read by clicking here.

Recently, the Hon’ble minister lowered the tax rate to 22 per cent without the exemptions thereby taking India towards the optimal level that would maximize our corporate tax revenue. This figure of 22 per cent is important as the Finance Ministry – and the CBDT would have definitely carried out an extensive exercise to arrive at the figure. But, more importantly, it shows how we’ve moved away from our skewed understanding of a linear relationship between tax revenue and tax rate. This is by far a more important take-away as it implies that in future our taxation policies will be more guided by rationality than by concerns of morality.

- article continues after ad - - article resumes -

The fact that there’s a concessional rate of 15 per cent for new manufacturing companies is another move that is clearly looking at making India one of the most tax competitive countries in the region. It is enough to make many firms that are exiting China look at India as a viable if not a better alternative to shift their supply chains.

A likely outcome of these changes is that in the medium term we may see a swift expansion of non-farm employment opportunities for India which will reduce the burden on agriculture and have a positive impact on wages of both farm and non-farm labour. Further, lowering of tax rates will also help Indian firms have better-retained earnings- before the tax rates our firms had one of the lowest retained earnings.

There are many reasons to believe that in our context trickle-down economics is likely to work; for starters, the tax cuts will help improve retained earnings and help our firms deleverage. Given the extent of positive investment opportunities in India, we will see a lot of these retained earnings get reinvested – the fact that we discourage dividends will implicitly result in them being productively utilized. Consequently, we may be able to absorb a lot of surplus labour from agriculture to Industry helping wages grow in both the farm and non-farm sector while improving productivity.

A key point worth remembering is that so far India has witnessed only a couple of years of reforms at a stretch. This has changed since the time PM Narendra Modi came to power. The reduction in corporate tax rates without exemption is not less than a reform or at least a part of the larger direct tax reforms that will happen sometime over the next couple of years. One is optimistic that with this continued series of reforms, we may finally transform the Indian economy by unleashing the animal spirits of the private sector.

- Support OpIndia -
Support OpIndia by making a monetary contribution

Trending now

Karan Bhasin
Karan Bhasin is a political economist by training and has diversified research interests in the field of economics. He tweets @karanbhasin95.

Latest News

Concerns over fudging data after Kolkata Municipal Corporation lists 10 deaths due to Wuhan Coronavirus while state govt records only 5

Unlike other states which are attributing the cause of death to the Wuhan Coronavirus in case the deceased has tested positive for the virus, the West Bengal government has set up an 'expert committee' to determine the cause of death after going through the test results, medical history and other documents of the deceased.

Mumbai lockdown: Speeding biker drags on-duty policeman posted at a checkpoint, one Sheikh Naeem arrested

Despite the police team's order, Naeem suddenly increased his speed further and tried to ride away. Assistant Inspector Vijendra Dhurat managed to grab a hold of the bike’s rear handle and was dragged for over 25 feet.

Madhubani: To protect Suleiman and others, accused of murdering a Hindu woman, village head Fakre Alam tries to get autopsy report changed

Madhubani: Surendra Mandal, the son of deceased Kaili Devi revealed how the accused were being protected by the village Sarpanch (head) Fakre Alam and local RJD MLA Fayaz Ahmed.

Prayagraj: Police book university professor Mohammad Shahid for concealing information about attending Tablighi Jamaat event in Delhi

The varsity administration may also initiate action under against Prof Shahid for not following the health protocol and risking lives

Bhagalpur, Bihar: Muslim youth pelt stones and open fire at Police after being asked to go home on Shab-e-Barat

Stones were pelted at the Police at Bhagalpur in Bihar when they attempted to prevent Muslims from gathering in large numbers on the occasion of Shab-e-Barat in the wake of the Wuhan Coronavirus pandemic.

Hindpiri, Ranchi: Sanitation workers refuse to disinfect the area after residents spit at them, throw spit-ridden 10 rupees notes at them

Residents of Hindpiri spit on sanitation workers trying to disinfect area after numerous cases of the Wuhan Coronavirus was reported there.

Recently Popular

Did you know that the Prime Minister’s National Relief Fund had the President of Congress party in its managing committee

After PM Modi launched PM CARES Fund, a lot has been discussed about similarities and differences between PM CARES Fund and PMNRF

As India fights Wuhan Coronavirus, here is a list of prominent Hindu Temples and religious leaders helping India through donations and welfare

In the wake of the Coronavirus crisis, numerous Hindu temples have come forward to contribute generously, both in terms of food and welfare, to help the country.

Tablighi Jamaat had planned a ‘fidayeen’ attack on India by spreading the deadly coronavirus: UP Shia Waqf Board chief Waseem Rizvi

Rizvi also said that there is a distinct possibility of radical Islamist Zakir Naik being involved in Tablighi Jamaat conspiracy to spread coronavirus in the country.

Yes, Nandita Das, there are two Indias that exist – one where the labourers live and the other, from where your father was evicted

About how the Coronavirus lockdown has impacted migrant labourers, Nandita Das said that there exists two Indias

Islamists attack Delhi CM Arvind Kejriwal after he asks them to stay at home on Shab-e-Baraat

AAP Supremo took to social media to request Muslims to stay at home for Shab-e-Baraat, which is being celebrated on the intervening night of 8th and 9th April.

Subscribe to our newsletter

Each morning, get an email to keep updated with all the news, opinions and analysis published by OpIndia.

Connect with us

218,267FansLike
278,208FollowersFollow
215,000SubscribersSubscribe
Advertisements