Has Corporate Tax Cut in 2019 achieved its Goals ?

Has Corporate tax cut increased investment/employment ?

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Finance Minister Ms Nirmala Sitaraman? reduced the Corporate Tax in July 2019 from? 30 %? to 20 %? stating that these measures will promote growth and boost investment

The step to cut corporate tax is historic. It will give a great stimulus to Make in India, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win - win for 130 Crore Indians – Source – PM Tweet after FM announcement

The idea, as the press release accompanying the announcement had put it, was to "promote growth and investment" and to "attract fresh investment in manufacturing". The hope was that as firms would make higher profits, they would invest more and expand their capacity.

A few years later Government stated in parliament that ,Government suffered a revenue loss of Rs 1.84 lakh crore in 2019-20 and 2020-21 due to reduction in corporate tax rates effective from 2019-20, according to parliament committee on estimates

The revenue loss for 2021-2022,2022-2023 is not available in public domain as of date

Finance minister Nirmala Sitharaman said? in March 2024, the corporate tax rate cut in 2019 has resulted in an uptick in private investments? ,also spurred credit growth, and stressed the need for capacity expansion in areas with high employment potential. (Source -March 2024 Economic Times )

Finance secretary Mr Somanathan, Govt Of India, stated on 3rd Feb 2024 ?to a news channel (ET Now) ?that the 11-percent increase in capital spending for FY25 is in fact significant given that it comes on the back of a lower nominal GDP growth of 8.9 percent in the current financial year. With or without private capital expenditure, India has enough firepower to sustain the rate of growth at the current levels

The government has not taken any steps that will restrain growth to a rate below what it is this year and private capital expenditure can only increase this growth rate further, Somanathan said citing the increase in total expenditure as well as on the spending on infrastructure for next fiscal. Further he stated

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"Without the private sector coming forward, we have achieved the growth rate we have achieved the growth rate we have achieved. We will continue to be spending more next year then we spent this year,"

In the back drop of the above statement from FM, PM and Finance secretary let us look at whether the corporate rate cut has given then intended results as was envisaged by the FM in 2019

Rationale for corporate tax rate cut

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First, making Indian corporate tax rates competitive vs peer group of countries. Second, a lower tax rate lowers the required rates of return for investments which induces firms to invest more. Third, a lower tax rate increases firms’ cash availability, which also spurs capex by firms.

Thus GOI itself is admitting growth is there with or without private sector investment which was the? objective of the tax cut in the first place

The share of manufacturing in the economy, both in real and nominal terms, has contracted between 2018-19 and 2022-23 – This can be a factor of the pandemic effect ?

As economists Nikhil Gupta and Tanisha Ladha of Motilal Oswal estimate, in 2022-23, the share of the corporate sector in total investments fell to its lowest in 19 years

RBI in one of its reports had commented that "In recent years, the private corporate sector's saving-investment gap has almost closed and most of its investment is financed through its own saving, indicating a falling appetite for fresh investment.One of the arguments is that increase in capacity due to tax cut will happen over a longer period of time and it is too early to make any conclusion

It is pertinent to note that non corporate tax payers paying a higher tax rate is a new thinking of the govt but this has to been seen in the light of the write of Corporate loans by banks to the extent of around Rs. 12.5 lac crores ( ?the argument given is this is only a write off and recovery process will be on going? and this is required to strengthen the PSU balance sheets ,but the data shows not even 15 % is recovered from these till date. ?This write off is at the cost of honest tax payers which needs a closer review as honest tax payers are footing the bill of the corporate sector which has not delivered the results and were deviant and some have even fled the country or in jails or have deep political connections )

The surplus generated by the corporate tax cut is unlikely to be invested in manufacturing because of poor consumption demand in the economy and less than enthusiastic outlook for consumption expenditure that the RBI consumer confidence surveys show.

Nobel laureate Paul Krugman had ?commented, When USA also reduced the corporate taxes like india, he had ?said that the corporate tax cut "had few real consequences for the economy".

The entire idea that a cut in corporate tax rate would encourage the private sector to invest a lot more has come a cropper. The problem is mass private consumption, which should ultimately incentivize greater private investment, continues to remain weak.

One of the objectives of the reduction was capital expenditure will get boost from private sector but that has not fructified even after five years

But companies have benefited tremendously from the cut in tax rates. Along with this, falling interest rates between early 2020 and early 2022 also helped them enormously. The net sales of listed companies in 2022-23 was 42% more than in 2018-19. On the other hand, their net profit was 189% more. But the amount they paid towards corporate tax went up by just 30%. A similar trend can be seen in case of unlisted companies as well.

The RBI its 2019-20 annual report said how the tax cut was used “ the corporate tax cut of September 2019 has been utilized in debt servicing, build up of cash balances and other current assets other than restarting the CAPEX cycle

Lower-tax rates required an exercise of options by Companies to give up certain deductions and exemptions. The tax-cuts typically benefited asset-light industries such as FMCGs.

Clearly, the idea of cutting corporate tax to encourage investment in India has not really worked. What was basically a prognosis in 2019 has turned into an expected result in 2023.Perhaps the most worrying aspect is that the top 0.9% of India Inc has benefitted the most from the rate cut. The 2019-’20 Economic Survey stated that 99.1 % of companies in India had a gross turnover of below Rs 400 crore and were anyway taxed at the base rate of 25%. With surcharge and cess, their maximum marginal rate varied from 26% to 29.12%.

On the other hand, only 4,698 companies had gross turnover of over Rs 400 crore and their maximum marginal rate varied from 30.9% to 34.61%. Thus, the impact of corporate rate cut varied from a gain of 3.2%-13.5% of the existing tax liability for small and medium Companies which were already making reasonable profits, especially fast-moving consumer goods firms, have strengthened their balance sheets on the back of the tax savings. The annual reports of the top fast-moving consumer goods firms show they have not made any major green field investment

Private capex, encompasses the investments that businesses make in acquiring, upgrading, and maintaining assets such as property, technology, and equipment. These investments are crucial drivers of economic growth and productivity because they create jobs and enhance operational efficiency, Private capex, ?encompasses the investments that businesses make in acquiring, upgrading, and maintaining assets such as property, technology, and equipment. These investments are crucial drivers of economic growth and productivity because they create jobs and enhance operational efficiency

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Central Capex Continues to Perform Well Over the past few years, the public capex has remained strong mainly led by the centre. The Government's steadfast commitment to capex is reflected in its budgetary priorities. Notably, the share of capex within the total expenditure has undergone a substantial increase, rising from 12.1% in FY21 to 22.2% in the budget estimate for FY24. Centre’s capex witnessed a growth of 48.1%YoY in the April-August FY24, with spending of 37.3% of the budgeted value of Rs 10 trillion which is higher than the spending of 34.6% of the budgeted value in the same period in FY23.

Due to lowering of taxes , the corporations had more PAT , and they themselves have admitted that these extra money was in fact used for purposes other than investment like buy back of shares, debt servicing, build up of cash balances and other current assets other than restarting the CAPEX cycle etc and adding fuel to the fire one of the stated objectives of FMs for tax cut it will boost employment which has come as cropper as there is no increase in employment at all which is one of the major worry for the country and its young population

But the individual income tax is more than corporate income tax which is a big anomaly which needs to be rectified as the purpose for which the reduction of corporate tax was envisaged has not borne fruit even after 5 years as the data clearly shows

The relationship of corporate tax rate with investment, innovation and economic growth needs an empirical study.

The current thinking of the GOI in this regard needs credible ?vigorous debate and serious rethinking. Only evidence-based tax policy and not impulsive, on-the-fly fiscal approach can boost the economy.

Therefore GOI should review this tax cut for Corporate’s ?in the ensuing budget and do justice to the honest tax payers

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