The Economic Times daily newspaper is available online now.

    View: Time for India Inc to ramp up investments as govt delivers on a long-pending reform

    Synopsis

    The foremost demand of industry had been to allow them a level playing field vis-à-vis their global counterparts in terms of tax burden.

    Corp taxAgencies
    The FM quoted in her budget speech that with determined human efforts, the task (of economic growth) will surely be completed. Amen to that!
    By Shalini Mathur

    Even as the GST Council prepared to meet in the balmy climes of Goa for yet another dialogue on the GST reforms, it was the direct tax announcement by the Finance Minister that became the show-stopper for the weekend.

    The morning of 20th September began with a discouraging front-page news in almost all economic dailies, cautioning that OECD had yet again cut India’s GDP growth forecast by 1.3 percentage points from 7.2% to 5.9%. The slowdown, coupled with the sharp outflows by the FPIs, slumped the markets drastically. As the businesses and analysts worried yet again about the lack of consumer spending, and the tight financial conditions restraining investments, the Finance Minister spun a mid-morning surprise that immediately lifted the spirits, and how!

    In almost all the pre-budget consultations with the Ministry of Finance in the recent years, the foremost demand of industry had been to allow them a level playing field vis-à-vis their global counterparts in terms of tax burden. The high burden was adversely impacting their reinvestment ratios, making equity costlier compared to debt. With the earlier combined burden of corporate income tax and dividend distribution tax at 46%, the OECD recently gave India the dubious distinction of a country with the highest statutory rate among 94 jurisdictions covered by it. This is now set to change with India on a very competitive footing with not just many of the OECD countries but also its closer neighbours like China, Indonesia and Philippines.

    The lower tax comes with the price that the companies will need to forego all incentives and deductions allowed under the income tax law. There is a section of companies which would like to go for a ‘cleaner’ tax system that allows them a low tax rate but without the convoluted system of exemptions. In the words of the Kelkar Committee, the system of exemptions and incentives is inefficient, iniquitous, impose greater taxpayer compliance burden and administrative burden, result in revenue loss and complexity of the tax laws, and encourage tax avoidance and rent seeking behaviour. Given these costs, the option to the taxpayers to go for a simpler system with fewer disputes will be welcome by many companies.

    Secondly before the rate cut, the non-manufacturing sector that contributes 63% of the total tax liability, had a higher average effective tax rate of 30.6% as compared to manufacturing sector at 27.8%. As per government’s own estimates, about 88,000 companies that contributed more than 53% of the total tax collected from all companies, had an effective tax rate of more than 30%. These include companies in the R&D sector that had an effective tax burden (ratio of total taxes to the total profits before taxes) of as high as 41.2%, financial intermediation sector (40.3%) and education services sector (35.3%). Even in the case of manufacturing, companies such as those engaged in the manufacture of paints or communication equipment had an effective tax burden of 34%. All these companies should stand to gain more with the new rate structure.

    The 15% tax rate for new manufacturing investments made after October 2019 and before March 2023 is clearly aimed at luring opportunities in competing jurisdictions. At a time when Indian manufacturing exports and FDI have been stagnating, the move will encourage fresh investments and enable more competitive exports. Of course, there may be some time lag before the companies, especially the long-cycle manufacturing companies, reap the dividends of the lower tax and plan for expansion or making fresh investments. Overall, with time, it will lead to enhanced investments and jobs.

    The FM’s announcements signal one more aspect. That is, the government seems to have accepted a slippage in the fiscal deficit target to some extent. Together with the incentives package for exports announced earlier, the rate cut measures are estimated to lead to a revenue foregone of about 1.95 lakh crores or 1% of the GDP. Till now, the government was focused on limiting fiscal deficit to 3.3% of GDP for 2019-20. However, with the economic growth slowing down from 8.1% in the last quarter of 2017-18 to merely 5% in the first quarter of this fiscal, it clearly recognises that additional expenditure is the bitter pill needed for the ailing economy. The States, however, may not find it appetising to see a slash in the 42% tax allocations to them at a time when they are already suffering a resource crunch.

    So, what’s next? The tax relief has been hugely welcomed by the industry. It should now do its bit to invest more, create jobs and stimulate demand. To supplement its positive steps with measures to push demand, the government should undertake higher capital expenditure. Growth in Centre’s capital expenditure during the first quarter of this fiscal witnessed a sharp contraction of (-) 27.6% compared to 27.3% growth in Q1 of 2018-19. Further, to compensate for the revenue foregone, the non-tax revenues and disinvestments need to be augmented. It would also be important to bring the States on board for the infrastructure spending planned by the government. On the direct tax administrative front, the government must continue its initiatives to make tax-paying a simpler exercise, reduce litigation and build confidence among the taxpayers. The FM quoted in her budget speech that with determined human efforts, the task (of economic growth) will surely be completed. Amen to that!

    (The writer is Senior Director with the Tax Economic & Policy Group at EY India. Views expressed are personal and not of economictimes.com)


    (You can now subscribe to our Economic Times WhatsApp channel)
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
    (Catch all the Business News, Breaking News, Budget 2024 News, Budget 2024 Live Coverage, Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more

    (You can now subscribe to our Economic Times WhatsApp channel)
    (Catch all the Business News, Breaking News, Budget 2024 News, Budget 2024 Live Coverage, Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more
    The Economic Times

    Stories you might be interested in