Corporate tax cuts: Time for reform now

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Published: October 10, 2019 1:15:35 AM

Time is opportune for India to encash upon the dynamics of global supply chain. With its labour costs increasing and debt of SMEs rising, China is losing its competitive edge.

Reduction in corporate tax coupled with administrative and labor reforms can boost the economyReduction in corporate tax coupled with administrative and labor reforms can boost the economy

The world economy is in a state of flux. More so is the global supply chain. While economies/firms had expected progressive liberalisation of cross-border transactions, advances in production technology and information services, and improvement in transport logistics and services, reality has been different. Truncated trade policies at the behest of Trump, unavailability of easy credit loan, decreasing consumption demand and lack of liquidity in markets, has contributed to the deceleration India’s as well as world’s GDP.

Time is opportune for India to encash upon the dynamics of global supply chain as China is losing steam. With labour costs increasing, and debt of small and medium enterprises rising, China is losing its competitive edge. Lowering of consumption demand is also adding to the current woes of the economy. More importantly, China-US trade war has jeopardised the situation. Many MNCs and companies are scouting to set up plants in other emerging economies.

But domestic risk factors, trust in the market and financial system due to emergence of NPAs and a high cost environment have rendered Indian manufacturing relatively uncompetitive. The reduction of tax rates to 25.17% for larger companies and the lower concessional rate of 17% inclusive of all surcharge and cess for manufacturing firms is expected to provide fillip to the investment sentiment.

Corporate tax reduction may lead to overall loss in revenue for the government, but can allow Indian consumption demand to go up. Newer products and services will entice the consumers to further increase the consumption demand leading to higher growth. This should also significantly alter the return on equity for new investment. And, may put India at par with other emerging and competitive nations like Vietnam, Indonesia, Thailand and other ASEAN countries.

Corporate tax cuts aside the government also needs to initiate administrative and labour reforms. A large amount of contractual labour is employed in the informal sector, which forms a part of the global supply chain. Thus, labour laws needs to be liberalised to make contractual labour as something of a continuous employment and these views need to be articulated in international fora to not be looked at as a trade barrier.

Administrative reforms in relation to refund of input tax credit is an area of concern for Indian industry. This was promised earlier when the GST was coming into effect. Still manufactures and exporters are not being able to avail full benefit. There is a need to process this in a time bound manner. Once this aspect is taken care of, credit-constrained export-oriented units will benefit from lending.

Just a reduction in corporate tax will not catapult industry to witness increase in investment demand and growth. Rather, how such financial capital can effectively participate in the production process is the main issue. It is important to remove these fears from the minds of the domestic and foreign investors.

More needs to done on the issue of comprehensive land law and labour reform. This would facilitate trade and industry to aim for more economic activity. This has been a long demand of industry and can’t be postponed forever. Lastly, it is necessary to provide measures such such access to international arbitration, advance tax rulings, etc, to avoid regulatory risk. Holistic reforms inclusive of corporate tax, administrative, land and labour reforms can boost the confidence of investors and drive the economy.

(The author is author is Professor, LBSIM, Delhi & former senior faculty, IIFT, Delhi)

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