There is a lot of noise being made on the decline in tax revenues, which is showing a de-growth after 2 decades. In today’s article, I will try to make sense of these numbers from a business point of view. The de-growth can be attributed towards:
- Reduction in corporate tax rates
- General economic downturn
In October last year, the government took a revolutionary step in reducing the
tax rate from 30% base to 25% and 15% in special cases and we all hailed it as
the biggest reform which was rewarded by an increase of 10% in Nifty and
Sensex. With globalization and interlinking of supply chain across countries,
this tax rate was more due to foreign compulsion, than economic slow. In 2018
USA cut its corporate tax rates from a peak of 40% to 27% changing global trade
dynamics. Our neighbouring countries competing with us to be the next
manufacturing hub have lower tax rates making them that much attractive
(Indonesia 25%, Vietnam 20%, Thailand 20%, Singapore 17%). Tax rates coupled
with frequent policy changes by Indian Government has failed “Make in India”
initiative and it was high time action was needed. Hence government rectified
its mistake of increasing corporate tax rate in budget and reduced it mid-way.
This is bound to have a short term impact on tax revenues, however, its
essential to make India globally competitive and bring in manufacturing into
India to employee millions of people joining our workforce. With higher
employment generation and economic activity, this shortfall will be more than
compensated in times to come.
2nd reason for lower collection is slow down in economic activity is a fact and
corporates have to resort to deep discounting and other promotional activities
to keep sales happening. Government has taken quite a few measures to increase
economic including GST rate cuts. Tax cuts coupled with other liquidity
injection measures (read it is as NBFC support) have started showing results
with both service & manufacturing PMI numbers showing an uptick in two
consecutive months.
There is a 3rd reason is the windfall tax gains which the government received
in 2018 especially for deals in digital space like Flipkart’s sale to Walmart.
These deals which were done at high valuations have taken a huge hit after
WeWork debacle and not so great Uber listing.
At the end of the day, India needs global manufacturing and services, which will come only when we are globally competitive across platforms, be it Infra, tax rates and compliance procedures or political stability. Over last 6 years, present dispensation has worked hard to streamline policies (proof is an upward movement in global competitive index), it’s now time to start enjoying fruits of hard work. Only if the country is willing to give time… now this a discussion topic for another time and place
