The demand by India Inc for an across-the-board cut in both direct and indirect taxes in the forthcoming Budget is quite reasonable, given the buoyancy of tax collections and the need to increase aggregate demand by boosting the spending power of consumers as well as companies. The Laffer curve argument that lower tax rates result in higher collections seems to be working. The reduction in corporate taxes on firms with income above Rs 1 crore to 33.99% in the last Budget, down from around 39.55% at the start of the decade, has already led to a flood in collections. Corporate tax revenues are now 3.7% of GDP, a doubling of the proportion over that period. A revival in business conditions, accompanied by market expansionist strategies (distinct from cost restructuring), may account for some of that bounce, but lower tax rates have surely contributed to the upswing. Also, while corporate taxes are still on an incline, a cut in rates now could act as a fiscal stimulus to pre-emptively counter the possible ill-effects of a manufacturing sector slowdown, the profit implications of which would be evident only in 2008-09. Those opposed to such tax cuts argue that the corporate sector?s taxation burden in India is lower than in developed capitalist countries like the US (40%) and Germany (38.36%). This may be so. But the global average rate is only 26.8%. Besides, of direct relevance is the taxation scenario in the neighbourhood. And Asian economies tend to levy much lower corporate tax rates, with those in Korea (27.4%), Vietnam (28%), Taiwan (25%), Thailand (30%), Indonesia (30%) and Singapore (20%) being particularly instructive. India should set itself a goal of achieving an equivalence with such rates.
Equally convincing is the case for a reduction in annual income tax rates. As corporate salaries soar, it is bizarre that personal income of above an annual Rs 2.5 lakh should attract peak slab rates in India. Given that such a level of income hardly makes for a lavish lifestyle, this cutoff needs to be doubled at the very least. It may even spur demand for consumer products. As for lowering excise duties, this could be done with the purpose of reducing non-progressive taxes per se. But there is already a roadmap towards a common GST, and a patient adherence to this would serve the economy well.
