Thread by @AltsarkarF

#CorporationTax #AltSarkar's view and commentary.
First the good news: FM @nsitharaman’s corporate tax cut is a clear sign that #ModiSarkar is worried about the state of the #Indian #Economy. That’s good because it means she acknowledges the scale of the #budget2019 cock-up.

Now the bad news: a day earlier, @RBI Governor, @DasShaktikanta, said that the Government’s fiscal space is limited. This means: don't cut taxes, don't spend more than budgeted. He also said, spend resources 'fruitfully' i.e. to get the 'most bang for your buck'.

And now the even worse news: this 1.5 Lakh Crore tax giveaway is neither necessary nor sufficient, in and of itself, to solve the problem that spurred it - the slump in economic growth. Like antibiotics that neither help a common cold, nor make the body stronger. Here's why

Lets understand what #CorporationTax (CT) is. If a company makes a pre-tax profit of say 100, it pays a percentage of it to the Govt as tax, If its an Indian company the rate is 30% so it pays up 30. But its complicated - exceptions, cesses, surcharges. See this from Deloitte:

So what happens if the tax rate is cut.
1. The Corp gets to keep more of its profits. It may either retain the windfall as equity, re-invest it, or give it away in dividends to shareholders. But a windfall also has other effects:

a) The pressure weakens to to become efficient, seek new markets, raise productivity.
b) Because of the agency problem coupled with poor corporate governance managers may simply pay themselves more.
c) Managers may not pass on the tax break in lower prices.

d) A wage rise for workers is the least likely outcome, esp. given the lack of jobs, making it an employer's market, .
On the other hand:
2. the Govt loses revenue that it had budgeted for.

https://twitter.com/AltsarkarF/status/1174959694961446912?s=20

We know that a third of the way into FY 2019-20 (Apr - Jul) only 20% - a fifth - of the direct tax estimated in #Budget2019 has in fact come in. So the revenue deficit hole has just become bigger. Meanwhile, almost 80% - 4 fifths - of the planned fiscal deficit has been incurred.

So we have a choice, or rather the Govt has a choice. either a) to cut back on its expenditure, or b) allow the fiscal deficit to breach the 3.5 % of GDP ceiling by a considerable margin - to 4.5%. That tax give away has #consequences - #NoFreeLunch and all that

Here’s what I said in my acceptance speech as FM, about the role of business taxes in the context of the polcy options open to Govt. to promote enterprise and industry in the economy:
Note: the corporate tax rate is seldom the single most cost businesses face.

If you look at the range of corporation tax rates across the world, you have to ask, why do companies not all migrate to the lowest tax jurisdiction, and how do businesses survive at all under high tax regimes?
See: www2.deloitte.com/content/dam/De…

The fact is, that all other factors being favourable, a low tax regime would attract businesses to set up. But as important as the rate is the consistency, certainty and perceived fairness (in the context of #TaxTerrorism) and swiftness of resolution of tax disputes.

Will this Tax give away solve the immediate problem of falling demand growth in #India?
I think that is unlikely. As a stimulus it is poorly targeted at the sector least likely to spend their windfall on consumption. Raghav Bahl puts it well: thequint.com/voices/opinion…

Here’s the bottom line: High business taxes are not good to encourage firms and businesses. But the key is consistency, certainty. Other non-tax factors are perhaps more important to attract businesses and help them flourish, grow and and generate economic activity.

Cutting corporation tax - so soon after a budget presented in a blaze of self-congratulatory glory gives a distinct impression of a regime that is at sixes and sevens, ill-equipped to plan sensibly, responding to the loudest lobby with a 1.5 LakhCrore free lunch to the well-fed.

The price for it will be paid by poorer sections of society in terms of fewer job opportunities, poorer public services, delayed investment in education, health, and housing.
#AltSarkar does not support this knee jerk response that makes a drama out of a crisis. We can do better