Raise the corporate tax rate; big firms will gain share from MSMEs in recovery, should pitch in with welfare

By: |
April 24, 2021 4:45 AM

The big companies can afford to pay a 30% corporate tax for a few years. The additional revenue can be used to bring succour to MSMEs, increase MGNREGA allocations, even lower personal tax rates to boost consumption, which, in turn, could benefit the companies themselves

Corporate numbers have been good because, though the economy isn’t exactly on fire, companies are able to raise prices to pass on the higher costs of inputs.Corporate numbers have been good because, though the economy isn’t exactly on fire, companies are able to raise prices to pass on the higher costs of inputs.

Although new Covid-19 infections reported in the country have crossed 3 lakh a day, economists are reasonably confident the impact on the economy—in terms of GDP growth—will be less severe than it was in 2020. While states have enforced restrictions on mobility, there are unlikely to be protracted lockdowns anywhere. The June quarter could well be a bit of a washout, but demand is expected to perk up in the second half as the vaccination drive picks up and the festive season kicks in. However, while the second wave may cause the economy less damage than the first one did, once again, it will be the smaller businesses that get hit the worst.

It’s a two-track recovery. The larger and stronger companies will be able to ride out the storm; indeed, many will become bigger and stronger as they gain share from smaller players. Corporate numbers have been good because, though the economy isn’t exactly on fire, companies are able to raise prices to pass on the higher costs of inputs. Thanks to their strong balance sheets and cashflows, most of India Inc will do well in FY22. Indeed, that the rebound in real estate is skewed to the premium segment suggests those that were already well-off are even better off now.

But an estimated 10 million salaried jobs have been lost—together in rural and urban India—and this will unquestionably delay the recovery in the broader economy. Having already been hit during the first wave, a big swathe of small or even mid-sized businesses could close down. Mahesh Vyas, MD&CEO, CMIE, estimates there has been a loss in incomes of 20%. While those working in the informal economy will manage to find a livelihood, salaried employees—whether in small or mid-sized enterprises—will find it much harder to do so. They would need to reskill and be given the opportunity to do so. The government must come up with an adequate response to this situation. It must support the economy in general so that more businesses can flourish and support more employment.

As economists have pointed out, this time around, the response needs to be predominantly fiscal. The measures announced in March 2020 were primarily aimed at easing rules and bringing in structural reforms with little additional spending. While the reforms were much-needed and long overdue, the sectors they relate to would attract risk-capital only over the medium term. The government did provide relief for MSMEs; a total of Rs 3.7 lakh crore or a shade under 2% of GDP, which included a Rs 3 lakh crore subordinated debt assistance for equity infusion in stressed MSMEs, equity infusion via the Fund of Funds. But, the total fiscal impact of the first package was very small; Nomura estimated the roughly 6.5%-of-GDP-sized package would deliver a fiscal deficit dent of about 0.8% of GDP. In October last year, the government rolled out measures to stimulate demand with a view to encourage consumers to spend; at an estimated 0.2% of GDP, they were underwhelming.

While the recovery may have been faster than anticipated, the economy is still in trouble, and what’s needed is immediate help to stimulate the environment and arrest the joblessness. The tax collections for FY21 have been robust with the net receipts higher than revised estimates by Rs 78,000 crore. The Centre collected Rs 9.45 lakh crore from direct taxes (post-refund, pre-devolution) higher by Rs 40,000 crore than the RE; corporate tax revenue exceeded the revised estimates by Rs 11,000 crore.

The government should use this opportunity to raise corporation tax rates; companies are doing exceptionally well and can afford to pay a higher tax rate for a couple of years. A 30% tax rate won’t kill them. These are extraordinary times and call for special measures. The rates can be reversed after two years. Meanwhile, the additional revenue can be used to bring some succour to MSMEs and also the less privileged; MGNREGA allocations can be increased and more cash transfers can be made. Personal tax rates for the lower income slabs could be lowered; the 30% rate, in any case, kicks in way too early at Rs 10 lakh. Government officials will argue a fiscal stimulus doesn’t always lead to spending, many consumers might prefer to save. After a second shock that would not be surprising, but there is nonetheless a case for fiscal stimulus.

The labour-intensive manufacturing units—even in the exports sector—are struggling to get back on track after multiple shocks since DeMo. The weakness in the smaller units in sectors such as textile, gems and jewellery, leather and handicrafts is worrying. Risk-averse banks—credit-growth to industry is languishing at near-zero levels—will be even more reluctant to lend to MSMEs now. The private sector is unlikely to step up capex meaningfully since capacity utilisation is still sub-70%, and significant sums have been spent on acquisitions in the past few years. So, in the meantime the economy needs some near-term support. Remember, many of those who have lost their livelihoods have moved to the agricultural sector as seen in the strong demand for MGNREGA; that would pressure wages. Inequality is worsening, and we must try to remedy it. Let profitable companies help the less-privileged. Raise corporate taxes.

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