Raising deficit by cutting tax rates is OK, go for it!

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Published: August 21, 2019 3:27:46 AM

If the lower corporation tax is accompanied by a replacement of the DDT with a tax on dividends in the hands of the shareholders, for instance, by way of a dividend withholding tax, it would remove the double taxation that the current DDT structure results in.

Corporate tax, FM, Nirmala Sitharaman, economy news, Narendra Modi, tax cut, Direct Taxes Code, DTC, financial express editorial, financial express, Nirmala SitharamanAlso, 25% has to be the all-inclusive rate, there cannot be—as there is now—further cesses on this, on top of which you have the CSR ‘tax’ of two%.

If initial reports on the Direct Taxes Code (DTC) panel report are anything to go by—the report is not yet public—there will be sizeable relief for the middle and upper-middle classes as well as for corporate India, where a flat 25% rate appears to have been recommended; and, it appears, the rates will be the same for Indian and foreign firms, along with a branch profit remittance tax for the latter. What is not clear, and this is critical, is when the report’s recommendations will be implemented; keep in mind, the 25% corporate tax was something first promised by Arun Jaitley in 2015, but the promise was never kept for the bigger firms; and while 25% was the prevalent rate then, several countries like Vietnam have further lowered taxes for foreign investors, so while a cut in tax rates will be welcome, India may still have higher tax rates than competitor countries.

Also, 25% has to be the all-inclusive rate, there cannot be—as there is now—further cesses on this, on top of which you have the CSR ‘tax’ of two%. If the lower corporation tax is accompanied by a replacement of the DDT with a tax on dividends in the hands of the shareholders, for instance, by way of a dividend withholding tax, it would remove the double taxation that the current DDT structure results in. It is not clear what the DTC panel has recommended on various exemptions and rebates that are allowed now, but if these are done away with—as seems logical—funding the lower tax rate may not be too difficult; to the extent this does cause the deficit to rise, this can be made up by compressing expenditure, though a slightly higher deficit due to a tax cut could be termed a good deficit as it will raise compliance.

It is not clear what exactly has been suggested for personal income taxes, but the top tax of 30% comes in too early at an income of Rs 10 lakh; the earlier DTC had recommended this be raised to Rs 20 lakh and that was a long time ago; the top rate will also fall if corporate tax rates fall to 25%. It is not certain if the new DTC suggests doing away with all exemptions and rebates like 80C and D, but their presence makes it easier for tax avoidance; the absence of exemptions will also make filing taxes easier. The structure of taxes also invites tax avoidance: after a zero tax for those earning up to Rs 5 lakh, for instance, the tax rate jumps to 20.8% for those in the Rs 5-20 lakh income bracket; so, anyone whose income is even a few lakh over Rs 5 lakh will find ways to try and lower their taxable income. Also, while finance minister Nirmala Sitharaman hopes to earn around Rs 12,000 crore more with her rich-surcharge, she will earn more from greater compliance with lower tax rates. While just 81,344 individuals reported earnings of more than Rs 1 crore, the latest all-India income survey by research agency Price estimates the number of those earning over Rs 1 crore at around 6.4 lakh in FY16; while Price estimates there are 11.6 lakh persons who earn Rs 50-100 lakh a year, just 1.4 lakh persons declared this to be their income in FY16. A 20% hike in the number of crorepatis declaring their incomes—assume an average income of Rs 2.5 crore—if the tax rate is slashed to 25% will, for instance, still lead to Rs 50,000-55,000 crore additional collections even after accounting for the loss in revenues from the existing taxpayers paying at a lower rate. The budget’s higher taxes—including on FPIs—did considerable damage to consumer/investor sentiment, so the government should use the DTC report to fix this and usher in a lower-tax regime at the earliest.

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