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Focus: GS-III Indian Economy

What leads up to Corporate Tax cuts?

  • The Indian economy had been caught in a slowdown even before the pandemic hit. This made the case for a fiscal push even stronger.
  • India’s revenue projection and collection abilities are facing an unprecedented crisis. Gross tax collections in 2019-20 were less than those in 2018-19.
  • This is only the second instance since 1961-62 of tax collections having declined on a year- on-year basis.
  • This is largely the result of what can be described as a bad gamble on corporation tax cuts to revive economic growth.

Tax Buoyancy Concerns

  • These figures raise serious questions on the government’s tax buoyancy assumptions.
  • Tax buoyancy is the additional revenue generated per unit increase in GDP.
  • If tax collections went down when the economy was growing, they could suffer a huge fall when it is headed for a contraction.
  • This also raises serious questions on assertions about decisions such as demonetisation and the Goods and Services Tax (GST) leading to a widening of the tax base.

Reduction in Collection of Tax

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Provisional figures for 2019-20 put gross tax collections in 2019-20 at ₹20.09 lakh crore. This is lower than the ₹20.8 lakh crore collected in 2018-19.

The Centre for Monitoring Indian Economy (CMIE) database shows that it is only the second instance (after 2001-02) since 1961-62 that tax collection had fallen on a year-on-year basis.

What explains the fall in tax collections?

  • The government announced a reduction in corporation tax rates in September last year.
  • It slashed corporate tax rates for domestic manufacturers from 30% to 22%, while for new manufacturing companies; the rate was reduced from 25% to 15% provided they do not claim any exemptions.
  • This was expected to lead to a revenue loss of ₹1.45 lakh crore.
  • This was justified on the grounds that the move will revive the economy.

Did slashing Corporate Tax work?

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  • The gamble seems to have backfired badly. The revenue loss is bigger than expected. BE for corporate tax collection was ₹7.66 lakh crore in 2019-20.
  • The provisional figures are just ₹5.56 lakh crore, a shortfall of ₹2.09 lakh crore.
  • Gross fixed capital formation, which measures new investment activity, contracted 3.9% on a year on year basis in the quarter ending September 2019.
  • It contracted at 5.2% and 6.5% in the quarters ending December 2019 and March 2020.
  • The only major revenue head which had over performed vis-a-vis BE targets in both 2017-18 and 2018-19 was corporation tax, however, due to September’s tax cuts, this item had the biggest shortfall in 2019-20.

-Source: Hindustan Times

December 2023