Recently, the Finance Minister has been so regular with her press conferences that most of us would be highly surprised if a week goes by without her holding a press conference and announcing a major economic decision. Purists are aghast by the frequency and speed at which Budget provisions are being changed, hardly a month after the President signed them into law, that too at a time when Parliament is not in session. The latest press conference on 20 September, in which the FM announced a cut in corporate tax rates was deliriously welcomed by investors with the Sensex jumping by 5.32 per cent ~ a record 1921 points in a single day.
Contrast this with Budget day, July 5, when the Sensex fell by 400 points, while the Budget speech was being read out. However, it is debatable whether the Budget deserved such a gloomy reception and the Budget changes such an ecstatic one. The Budget promised a $5 trillion economy in the next five years through exports, investments and savings. However, it had a basic flaw; high on rhetoric the Budget lacked adequate measures to promote either exports or investments or savings. Additionally, tax on Foreign Portfolio Investors (FPIs), who keep the Sensex healthy, was raised to an unconscionable level of 42.8 per cent, which set the Sensex on an erratic downward trend. So, in her first press conference held on 23 August, the FM provided succour to FPIs.
Amongst other reliefs she also released Rs 70,000 crore for recapitalisation of Public Sector Banks recapitalisation and Rs.30,000 crore to Home Finance Companies. On 28 August, 100 per cent FDI for coal mining and contract manufacturing was cleared. On 30 August, the FM announced the mega-merger of ten Public Sector Banks into four banks. Then, on 14 September a Rs 20,000 crore fund was created for completing stalled housing projects and export incentives of Rs 50,000 crore were also announced. Meanwhile, the Jalan panel recommended the transfer of Rs 1,76,000 crore from RBI to the Government. If that was not enough, to boost demand, PSBs and NBFCs have been directed to hold loan melas in 400 districts ahead of the festival season.
Unfortunately, even such generous measures could not drum up demand in the economy. Hence, on 20 September the FM reduced the corporate tax rate to 22 per cent + surcharge + cess (in aggregate 25.2 per cent), for those corporates that were willing to give up all other exemptions and incentives. Further, manufacturing companies set up after 1 October 2019 are to be taxed at a flat rate of 15 per cent + surcharge + cess (in aggregate 17.1 per cent), provided they give up all other exemptions and incentives. The rate cuts have enthused the share market, despite the rate cut being illusory for the vast majority of existing manufacturing companies, firstly, because 99 per cent companies have a turnover below Rs 400 crore and are currently being taxed at 25 per cent + surcharge + cess. Second, manufacturing companies are availing of a host of benefits like Chapter VIA deductions, additional depreciation, investment allowance etc which takes the effective tax rate of most manufacturing companies to well below what is being offered to them.
Thus, the rate cut would benefit non-manufacturing companies which may or may not plough back the tax bounty in manufacturing activities. The same logic would apply to newly formed manufacturing companies but then, the new provision is aimed at those foreign investors who would like to set up shop in India and who want certainty in tax rates and do not want to be at the tender mercies of the Indian Incometax authorities. One can add that the tax rate of 17.1 per cent is comparable to that of other Asian countries and if tax rates were the sole criteria for investment then we would be able to divert the investment meant for most other countries to our shores. While wishing well for the FM for her hard labour, one may point out that the total number of corporate taxpayers is less than 8,50,000 and corporates provide employment to less than 20 per cent of the industrial workforce.
As opposed to corporates, firms are taxed at a flat rate of 30 per cent, while proprietary businesses have to pay tax at 30 per cent should their income exceed Rs 10 lakh. Firms and proprietary businesses taken together, number more than 5 crores and employ 80 per cent of the workforce. One can safely say that there would have been a surge in spending and employment if similar tax cuts had been given to non-corporate taxpayers as well. Also, even if companies decide to invest the money saved in taxes, there would be a time lag between the saving and investment. True, the share market would rise and FPIs, investors and speculators would make quick money but tax cuts alone would not reverse the fall in demand immediately.
The present economic downturn could probably have been handled better if the Government had decided to invest at least part of the Rs.1,45,000 crore of the foregone tax revenues in rural infrastructure and jobs because corporates have deep pockets and easy access to credit and make investment decisions at only the right moment whereas poorer sections of society are likely to spend any extra money quickly either in income generating activities or in consumption. With the FM’s giveaways, we are sure to miss the budget deficit target of 3.3 per cent by at least one percentage point. The spirit in which the revenue department passes on the tax cuts also merits thinking. Niti Aayog has set the ball rolling by saying that deficit would be controlled because tax revenues would rise, which could only happen if the tax department adopts coercive measures to collect disputed tax demands.
Such a course of action would negate the feel-good atmosphere sought to be created by the Government. Then, the announcement of relief measures in tranches raises a very pertinent question: Given the fact that the Government could not read the economic situation correctly at the time of the Budget, why could not the Government have a relook at the Budget and announce corrective measures for all sectors at one time? The way the Finance Minister is going about the whole thing, pressure groups are in full flow trying to force her hand. The business world is postponing vital decisions, waiting for the last word to be said on changes, which delays the quick response desired by the Government. Significantly, all announcements of the Finance Minister, made during the last two months are targeted at well organised big businesses with the implicit assumption that the growth of corporate India would power the growth of the rest of the economy. This assumption is itself open to serious doubt. In the present context, we should heed the words of the economist Ha-Joon Chang ~ “Once you realize that trickledown economics does not work, you will see the excessive tax cuts for the rich as what they are ~ a simple upward redistribution of income, rather than a way to make all of us richer, as we were told.”
(23 Things They Don’t Tell You About Capitalism)
(The writer is a retired Principal Chief Commissioner of Income-Tax)