Budget 2019 India: Will fiscal consolidation lead to tax competitiveness for India Inc?
By Shalini Mathur
Union Budget 2019 India: The first Budget of the NDA-2 will be presented against serious growth concerns and an eye on maintaining fiscal discipline, particularly in the wake of the large tax revenue shortfall amounting to about 0.9% of GDP. Given this, it would be interesting to see if the finance minister accommodates one of the foremost asks of the Indian corporate sector, i.e. reduction in the corporate tax rate to 25% for all companies, to enable them to be globally-competitive.
The CSO estimates real GDP growth at a five-year low of 6.8% in 2018-19 as against 7.2% for the previous year, with the last quarter of FY19 registering growth of merely 5.8%. Even nominal GDP growth declined to 11.2% for 2018-19 as against 11.3% for the previous year, and 11.5% for 2016-17. The assumed buoyancies for 2018-19, as per revised estimates for tax collections, were an ambitious 1.7 and 2.2 for corporate income tax (CIT) and personal income tax (PIT), respectively.
But, as per actual collection numbers, these have been limited to 1.4 and 0.6 for CIT and PIT, respectively, indicating a much larger shortfall in PIT collections. If budgeted tax revenues as per Interim Budget are to be retained, the implied buoyancies for 2019-20, when compared to the actuals for the current year, are 1.4 and 3.3, respectively, for CIT and PIT. It is notable the implied buoyancy for PIT is much higher than realised buoyancies in the last few years. These targets could be unrealistic, given growth slowdown.
It remains to be seen if the government manages to create fiscal space for fulfilling its promise of 25% rate for all companies. Private corporate investments in India have declined. As a proportion to GDP, private corporate investments fell from 17.3% in 2007-08 to 11.6% for 2017-18. The previous Economic Survey noted that growth of 7% can come on the strength of the only two truly sustainable engines—private investment and exports. A lower tax burden would be immensely helpful in incentivising investments.
India is a country with the highest statutory tax rate. The last few years saw reduction in statutory CIT tax rates, fuelling tax competitiveness. As noted by the OECD, the average combined (central and sub-central government) statutory tax rate has fallen by 7.2% from 28.6% in 2000 to 21.4% in 2018. Of the 94 jurisdictions covered by the OECD study, only 18 had statutory tax rates equal to or above 30%.
In 2018, eight OECD nations announced reduction in statutory CIT rates—Argentina (25% by 2020), Belgium (25% by 2020), France (25% by 2022), Japan (23.2% in 2018), Luxembourg, Norway, Sweden (20.6% by 2021) and the US (21%). The UK, too, proposes phased reductions in corporate tax rate to 17% by 2020. India’s tax rate is higher even when compared to Thailand and Vietnam (20% each), Malaysia (24%), China (25%) and Singapore (17%).
Reducing corporate tax rate to 25% for all companies may mean a potential revenue hit of `60,000 crore, as stated after Budget 2018 by the then CBDT chairman. It is expected there will be some revenue gain from withdrawal of incentives over the past two years. For instance, the highest revenue outgo for direct taxes has been accelerated depreciation. For 2016-17, when 100% accelerated depreciation was provided, the revenue impact for the government was `66,000 crore.
The depreciation was slashed from 100% to 40% across all assets with effect from FY18, which should yield a considerable sum by way of revenue clawback. Similarly, the weighted deduction for scientific research was reduced from 200% to 150%. Tax receipts numbers in Budget 2019-20 will reflect additional collections from long-term capital gains, estimated at `20,000 crore as per a media statement by former revenue secretary. These additional collections should provide some buffer to the government.
Larger companies continue to bear a tax burden that is among the highest in the world. In the interest of their competitiveness in the global arena, incentivising investments and job creation, the government should consider extending the lower tax rate to all companies. It would only be fair for these companies to expect, at a minimum, a clear roadmap for tax cuts, on the lines of incentive cuts.