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Reducing corporate tax vs reducing individual personal tax

Corporate Tax Rate in India

Recently Ms. Nirmala Sitharaman lowered corporate tax rates bringing cheer to a market that has been severely underperforming in last 12 months. As a result, BSE rose by over 2,000 points followed by another 1,000 points the next day. This was overall a gain of about more than 6% in two days.

In this article the focus will be on talking about the option of reducing corporate tax vs reducing individual personal tax. There are different schools of thought on this matter and economists across the globe have differed on what is the best way forward. Let us first be clear on one this. None of the steps can guarantee economic growth and the extent to which both pan out are always up for debate.

Corporate Income tax Reduction

 In layman terms, when, corporates pay less taxes, one of the following may happen

  1. They save cash and have the flexibility to invest that surplus in areas of business earlier left unexplored
  2. They can choose to reduce the selling prices of their products and hence create a forced demand and thus spurt economy; e.g. reducing an AC price further by 5% in winters may just be the incentive customer needs to spend that extra 25-30K
  3. They may choose to do nothing and just save; a lot of naysayers about reducing corporate taxes feel this might happen. To this the response must be that viewing corporate taxes in “relative terms” may not be right. At 30%, India was amongst nations with highest corporate taxes. At 25%, even though there is a relative reduction from 30%, we are still marginally higher than a couple of BRICS nation but now more competitive than before. In “absolute terms” 25% is not a low Corporate Tax rate. Imagine being a foreign investor with multiple options to choose from. There is China who are pioneers and an established force in manufacturing and tax you at 25%. Then there is India who are projecting themselves as future force to reckon who claim their govt wants to make in India but tax you at 30%. What will you do?

Personal Income Tax reduction

This leaves with common man more disposable income.

  • He may choose to save (in govt. deposits, etc.)
  • He may choose to shop, travel, eat out and thus bolster overall economy through what’s called a trickle-down effect
  • Or, at the same time invest in equities and thus giving corporates the cash that government wished for them to get through reduced corporate taxes.

Even though it is difficult to put a mathematical formula to relate a % increase in GDP with corresponding reduction in taxes there are certain possible scenarios:

  1. In an economy like India where the problem may be demand related, if the corporate doesn’t pass the benefit on to consumer the overall impact may be very limited in short term. In long term however, foreign investors will look at India as a favorable destination from a Tax perspective.
  2. Expecting corporate taxes to be a cure all may not be right. The govt must strive to provide to corporates a stable work environment by cutting Red-Tape, supportive policies with regards to land acquisitions, labor reforms, transparent work culture, etc.
  3. RBI having reduced more than 1% in Repo Rates this year already and with more cuts expected this year, I won’t be too surprised if there is a further reduction in Personal income taxes in next year particularly if the Inflation holds in comfortable range of less than 4%.
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