India has taken one of the boldest moves of reducing Corporate tax rate to global level of 22 percent.This is a sharp cut from existing 30 percent.It has got thumbs up from the Dalal street ,with the stock market rising sharply, and they have the reason to do so.Stock markets are meant for investors who are always looking for more Corporate Earnings.After this tax cut, the tax expenditure will go down and corporate earnings will improve which will in return increase the wealth of investor.So, the gala party at Dalal street is well reasoned and fireworks are meant to be there.But some basic questions have made me more nervous than happy.Do tax cut really pick up the consumer demand? Is this measure addressed for improving the economy or Corporate balance-sheet?
Let us first put the context in its place.India’s automobile industry, FMCG sector and even sectors like jewelry are seeing slowing of demand. Parle G sales fell down, Tanishq sales have fallen and automobile slump is very much in front of us. So, what India is witnessing is a slowing of demand because of stagnation of income levels.So, there was definitely a need of stimulating the economy.Government dropped the traditional keynesian economics and instead , felt it better to go for Corporate Tax rate cut.It is undoubtedly a good decision but its quantum and timing is more a cause of concern rather than a celebration.
The fiscal position of government is already very tight as the tax collections are falling and there is a clear risk of breaching fiscal deficit target of 3.3 percent this year.With the decision of corporate tax cut , government has further decide to forego 1.44 lakh crore every year.Importantly, it is not a one time stimulus, it is going to happen every year.From where will government get the capacity to implement this remains to be seen.If government cuts down on its own Budget , it means that it will have to reduce its own capital expenditure as it has not much control on revenue expenditure.So, it means government departments and its corporations who work mostly on government orders will have to slowdown their own expansion projects.Overall, the government it seems is betting big on Private Sector to revive the demand.
It is believed that with the corporate tax rate cut, the balance-sheet, the liquidity position and the savings of Corporate sector will improve.The above measure will surely sustain the private Corporations but how will they revive the demand is a big question mark.Will the private players pass on the benefit to consumers and increase the demand? It is naive to believe so. If that was the case, government would not have made GST anti-profiteering authority to ensure that Businesses pass on the benefit of ‘Input Tax Credit’ to the consumer.Instead of passing on the benefits to consumer, the corporations focused on maintaining or increasing their margins.For Private players , margins come first.Therefore, the benefit of tax cuts are unlikely to make a drastic difference in the price of end products.
Further, It is believed that this tax rate cut would increase the capital expenditure of private sector and revive the economy.When Private players are not able to utilize the existing capacity then how are we thinking that they will go for expansion projects. In fact, they will like to sit on cash pile and watch the economy.A private player cannot be expected to spend money only because he feels that there is a moral responsibility to spend the money.His basis for any project is the margin and if there is no margin , he will better sit on cash and enjoy interest.Another argument, is that this is going to make Indian Industry competitive.No doubt, it will make business environment better but ease of doing business is dependent on multiple factors out of which tax is only one of the deciding factor.
Corporate tax rate cut was long overdue but a staggered rate cut spread over the years would have been more meaningful in such a challenging economic environment.It seems government has played a big gamble with pushing so much weight behind Corporate tax cuts and sacrificing many other tried and tested options.As a citizen , I hope that government wins this gamble and as a consumer of economy , I hope the corporate India will make my Diwali also better just like their Diwali has become.