• Parag Negi
  • 14-Jul-2019

REVENUE VS TAX

Budget 2019 contained some major cahnges in the direct tax, both personal and corportae. It may be the last time that e itnessed such changes. Very likely hen budget 2020 is presented the goverment would have accepted the direct tax code report, and direct taxes  will go the  way of excise taxes out of the budget. 
The budget reduced the corporate tax rate CTR form 30 percent to 25 percent for all firms ith a turnover of rs 400 crore. Earlier 25 percent slab as applicable for firms ith turnover of rs 250 crore. The FM stated that thsi move  would cover 99.3 percent of all firms in india. However it is unclear as to ho much of the total corporate taxes is accounted for these 99.3 percent of firms.
Tax rates are alays an item of discussion and debate and no more so than ever. president trump loered the CTR for the US from 35percent to 21 percent in 2018. As shon beloe the loer tax rate as ell chosen by Trump because that is getting ahead of the story. OECD has recently released a comprehensive set of data on corporate taxes for close to 100 economies.India has one of the highest cororate tax rate in the orld and according to OECD it also has the highest effective corporate tax rate ECTR and that to by a huge margin. Indias ECTR is estimated by OECD at 44 percent. its defination includes all atxes paid by corporates in diffrent countries for example corporate tax, divident tax, capital gains tax, incidently the sceond highest ETR is for argentina and it is 9 percent loer than india, and third is france, 11 ppt loer. China has got all the invetsments nd groth at leats relative to india

In this age of globalisation, no country is an island. Competitiveness is affected by tax rates, interest rates, exchange rates, and labour costs. However, gone are the days when countries could devalue their way to prosperity. China accomplished this via massive undervaluation for about 20 years, from 1990-2010. Their success ensured that such undervaluation would never again be allowed by the Western powers. It is likely that Trump’s trade war would not have occurred if China had been more responsible with the setting of its exchange rate.What can countries do to improve their competitiveness, given that the mercantilist route is no longer an option? They can reduce its cost of capital, make labour more competitive, make industry more competitive, and rekindle animal spirits. On the first three counts, the budget has moved in the right direction. Sovereign bond borrowing is an idea whose time has definitely come, notwithstanding the perennial naysayers and those not comprehending the fundamental nature of change in the world. Inflation nowhere (including India) is the bogey it once was. Also naysayers should note, and answer the following question — between fiscal years 2004 and 2011 (the so-called Golden Age of Indian growth) the real repo rate averaged minus 1 per cent. For the fiscal years 2016-2018 real repo rates averaged 2.3 per cent. Go figure the growth implications.
 

Since Shaktikanta Das assumed governorship of the RBI, there has been considerable improvement in communication and a gradual lowering of policy rates, but this has also been accompanied by a more than equal lowering of inflation, that is, the real repo rate has yet to move below 2.3 per cent. The sovereign bond issue will help, but don’t look for a quick acceleration in GDP growth.

Exchange rate change is no longer operational, labour codes are too slow to change, and monetary policy is sluggish in its operation, and impact. The only real growth option for Indian policymakers — cut tax rates to internationally competitive levels. And what might that be? Around 22 per cent for all firms, and we obtain that result from a comparative study
 

But first, a comment on the personal income tax (PIT) rate increase in the budget. The move to increase PIT rates to developed country levels is not in the right direction. It seems that there was more old-fashioned morality (tax the rich) than revenue maximisation at play. At best, the government plans to raise Rs 5,000 crore more by socking it to the rich. (Total personal income tax collection is budgeted at Rs 5,00,000 crore). And even that may not happen as tax arbitrage between the much lower corporate tax rate and the near highest individual income tax rate (only 10 per cent of countries have a higher than 43 per cent top PIT rate) will move animal spirits towards payment of corporate tax. And if not tax arbitrage, tax evasion may lower gain in PIT collection.

Ostensibly, tax rates are set to maximise tax revenue — and tax revenue depends on both income and tax compliance. Tax compliance can either be considered as more firms filing taxes or more firms revealing a closer approximation to true income. Improving compliance alone can ensure greater resource mobilisation through taxation — and without increasing the tax rate (and may indeed occur if the tax rate is reduced).
 

Why is the effective tax rate in India so high? In India, firms must pay a corporate tax, which is followed by a surcharge and an additional 15 per cent dividend distribution tax (DDT). The revenue mobilisation from DDT is marginal compared to the overall tax revenue from corporate taxes. Estimates suggest that the resource mobilisation from DDT is just around 8 per cent of the total corporate tax revenue. A steep 15 per cent DDT only dissuades firms from issuing dividends to their shareholders. Forget about double taxation as there’s another moral Indian tax icing — if an individual earns more than Rs 10 lakh of dividend income, she must pay an additional 10 per cent tax. So the same income is taxed thrice in India — and only in India.Both the budget and the Economic Survey focused on revival of private investment to ensure sustained long-term growth. Thus, there is strong case for further and aggressive reduction in tax rates on the grounds of revival of investment, and helping India become a $5 trillion economy. With another budget just six months down the line, there is hope that the government will realise its mistake and depart from misguided taxation policies.