Monday, October 26, 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.

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.

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 Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

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

Related Articles

Trending now

This time for Dussehra, feminists turn Laxman Rekha into a symbol of ‘patriarchy’: Here is why they are batshit crazy

The occasion is Dussehra and along expected lines, feminists are out in numbers in their attempt to prove that Ramayana, the tale of Maryada Purushottam Rama, reeks of misogyny.

‘What Mumbai Police is doing is wrong,’ I&B Minister Prakash Javadekar speaks up on the hounding of Republic TV and Arnab Goswami exclusively to...

Prakash Javadekar gave an interview to OpIndia Hindi Editor, Ajeet Bharti, where he answered questions on a host of issues.

How Indian ‘liberals’ decided to embrace Hindutva!

At his traditional Vijaya Dashami rally in Mumbai yesterday, Maharashtra CM Uddhav Thackeray put it clearly. One must take lessons in Hindutva from RSS chief Mohan Bhagwat.

Dainik Bhaskar uses NITian Anita Bharti’s image in an article about actress Preetika Chauhan’s arrest by NCB in drug case

Anita Bhati is a student of NIT Patna, who had recently started an online portal of 'TuOn', providing free coaching to students from 7th to 12th grade and those preparing for competitive exams

Editors Guild issues a shameful statement tacitly condoning witch-hunt against Republic TV and Arnab Goswami by Mumbai Police: Details

After almost two weeks of the witch-hunt launched by Mumbai Police against Republic TV and Arnab Goswami, the Editors Guild has finally issued a statement

The Ritika Jindal Syndrome: The desecration of the Temple in Himachal Pradesh shows the urgent necessity of reform in public administration

Ritika Jindal received huge praises for breaking an "age old parochial tradition". She also "taught lessons of equality to priests" apparently.

Recently Popular

Editors Guild issues a shameful statement tacitly condoning witch-hunt against Republic TV and Arnab Goswami by Mumbai Police: Details

After almost two weeks of the witch-hunt launched by Mumbai Police against Republic TV and Arnab Goswami, the Editors Guild has finally issued a statement

Kerala: Photographer Dia John depicts Hindu deity as smoking weed, deletes picture after outrage

Kochi-based Mukkootil Bhagavathy temple had filed a complaint against Dia John for hurting Hindu religious sentiments

France: Charlie Hebdo cartoons projected on government building to express solidarity with deceased teacher who was beheaded by Islamic terrorist

Days after the barbaric beheading of teacher Samuel Paty on the streets of Paris by a terrorist for showing the cartoons of Prophet Mohammad to his students, support continues to pour in for the deceased teacher.

‘He supplies drugs and girls’: Estranged wife of Mahesh Bhatt’s nephew Luviena Lodh alleges harassment by nephew-uncle duo

Luviena Lodh said that Mahesh Bhatt is the don of the industry, and he controls everything that goes on in the film industry

After Turkey President Erdogan says Macron ‘needs treatment’ over attitude to Muslims, Pakistanis trend #boycottfranceproducts on Twitter

Pakistani bots putting their weight behind Turkey president Erdogan's call of 'giving treatment' to French President Macron.
- Advertisement -

YouTuber Lakshay Chaudhary levels serious allegations of fraud against Gaurav Wasan of Swad Official whose video on ‘Baba ka Dhaba’ had gone viral

Gaurav Wasan of Swad Official had uploaded a video about the financial difficulties faced by the elderly couple of 'Baba ka Dhaba'.

Pakistan: Foreign Office summons French ambassador over Charlie Hebdo cartoons

Foreign Office, Pakistan summoned the French envoy for the public display of Charlie Hebdo cartoons in French govt buildings.

Rajasthan: Dalit salesman burnt alive by liquor contractors after pouring petrol for demanding five months due salary

The victim used to work at a liquor shop and had not been paid salary for five months. His charred body was found inside a deep freezer in the gutted liquor shop.

Sameet Thakkar sent to police custody by Nagpur court till October 30, was arrested for making ‘Baby Penguin’ remark against Aaditya Thackeray

Two FIRs were registered against Sameet Thakkar for allegedly making objectionable remarks against Uddhav Thackeray and son.

BJP emerges victorious in Ladakh Autonomous Hill Development Council elections, wins 15 out of 26 seats

The BJP has won 15 of the 26 elected seats in the Ladakh Autonomous Hill Development Council (LAHDC).

This time for Dussehra, feminists turn Laxman Rekha into a symbol of ‘patriarchy’: Here is why they are batshit crazy

The occasion is Dussehra and along expected lines, feminists are out in numbers in their attempt to prove that Ramayana, the tale of Maryada Purushottam Rama, reeks of misogyny.

Republic TV and Maharashtra govt lock horns in Supreme Court: CJI asks both to submit affidavits in 2 weeks

Arnab Goswami and the Maharashtra government are at loggerheads since Republic Bharat questioned the silence of Sonia Gandhi in Palghar Sadhus' mob lynching case.

‘China’s world domination is imminent and Europe should wake up to this danger’: Former German spy chief cautions against Beijing

Gerhard Schindler, the former German spy chief, has asked European countries, particularly Germany, to reduce its "strategic dependence" on China

‘What Mumbai Police is doing is wrong,’ I&B Minister Prakash Javadekar speaks up on the hounding of Republic TV and Arnab Goswami exclusively to...

Prakash Javadekar gave an interview to OpIndia Hindi Editor, Ajeet Bharti, where he answered questions on a host of issues.

Chile to rewrite its Pinochet-era constitution, over 78% of Chileans vote ‘yes’ in the referendum

Over 78% Chileans have voted in favour of a new constitution, to be written by an 155-member elected body.

Connect with us

245,563FansLike
468,824FollowersFollow
19,300SubscribersSubscribe