Finance Minister Nirmala Sitharaman last week announced a sharp cut in the corporate tax structure. Accordingly, the corporate tax rate (inclusive of cesses and surcharges) applicable to businesses is set to come down from roughly around 35 per cent to 25 per cent. Without the cesses and surcharges, the rate is down to 22 per cent. What even bolder is the new rate of just 15 per cent for new businesses in the manufacturing sector (provided they start production before 2023).
While a lower corporate tax rate incentivises businesses to reinvest in existing businesses and makes new investments attractive, it also comes at the cost of lower tax revenues for the government. That, in turn, would likely lead to the government missing its fiscal deficit target. If on the other hand, the govt prioritises meeting its fiscal deficit, then it can happen only by reducing expenditure.
Yet, as has been reported widely in the media, the FM has said that “We want ministries to spend… Expenditure secretary is meeting secretaries from other departments every week to push spending by departments and PSUs (public sector undertakings)”. At the same time, according to a report from Reuters, the FM also ruled out revising fiscal deficit target. But FM Sitharaman said that the government would only review the fiscal deficit target closer to the 2020/21 budget. “At this point of time we are not revising any target. The decision will be taken later,” said the FM on Sunday.
Is it possible?
So, is it possible that India could manage to take a hit on corporate tax revenue collection – by an estimated Rs 1.45 lakh crore – and yet neither overshoot its fiscal deficit (which measures the total borrowings by the government) nor cut expenditure?
The short answer is no. A substantial hit on revenues will only aggravate the fiscal problems for the government. Already, thanks to a slowing economy, the revenues have been falling behind the budgeted figures. Considering that the economy is likely to stay in this lull for another couple of more quarters, revenue collection is unlikely to perk up suddenly. That would leave the government with just one option: cut expenditure.
Impact on fiscal deficit
According to Kotak Economic Research, the combined impact of a cut in corporate tax rates, weak GST and income collections will be a next tax shortfall of around Rs 1.7 lakh crore. That is 0.8 per cent of the GDP. But, the RBI’s additional dividend of Rs 58,000 crore will be handy in offsetting this blow. Add to this, the increased profitability of public sector undertaking – this can then flow back to the government in the form of higher dividends. The Kotak researchers also expect some cuts in expenditure such as PM-KISAN. As such, they expect the fiscal deficit for the current year to rise from the budgeted figure of 3.3 per cent (of GDP) to 3.7 per cent.
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