This is a policy problem -- this is a morality problem. Everybody wants infrastructure of Singapore in their cities and neighbourhood -- but when it comes to paying taxes, nobody wants to pay. Politicians will need to bring this aspect out. Paying taxes is a national duty. Do your bit should be the message.
The direct personal tax cuts probably have a better retention rate, but still have a low multiplier effect on GDP. Until we can address the root cause of stagnated/reducing private capital formation, we won't be able to spur growth in the medium term. I think the corporate tax cuts misdiagnosed the problem as 'lack of capital' to invest, rather than seeing it as 'business not having an incentive to invest'.
Excellent article. The corporate tax cuts are similar to what happened in USA in Mr.Trump's first term and the tax cut mostly went into share buybacks(same story). About the tax under litigation I think it would be very very hard. For example Volksswagen India made a net profit of about 36 million USD and suddenly the GOI is putting up a notice of 1 billion USD. Not only will Volkswagen not pay, It cannot PAY. There are many such litigations where people beleive the GOI is just greedy to rip off the corporates. Yes the CEO part , that will lead to income inequality.
Nonetheless I beleive consumption growth will happen when real incomes actually rise. My understanding is that the 1 lakh crore injection is just shifting money from govt capex to people. I think small buisnesses which evade taxes should be taxed and made to pay(though I agree I don't know how). It is not easy to hide billions of tax dollars of corporates.
If the corporate tax reduction has not had an effect, why is the government not increasing that and using that to offset the income tax cut? Valuations of companies may suffer perhaps, but the good ones will become more efficient or productive. And it is not as if valuation corrections will not happen, as we speak it seems to be ongoing.
Good question. I should have addressed this in the article itself.
The thing is, just like US interest rates control interest rates around the world, the US corporate tax rate controls global corporate tax rates.
The US lowered its corporate tax rate in 2018. Other countries, including India, had to follow suit to stay competitive; otherwise, companies would simply shift to the US, and we would lose out on foreign investment. Many Indian companies also have their headquarters in the US but do all their operations in India. This is called Base Shifting.
If you were a company what would you choose:
a) The world's largest economy with business-friendly norms and the most freely convertible currency charging you a 21% tax rate.
b) A developing country with not-so-business-friendly norms and a managed capital flow, charging you a 30% tax rate.
This is a policy problem -- this is a morality problem. Everybody wants infrastructure of Singapore in their cities and neighbourhood -- but when it comes to paying taxes, nobody wants to pay. Politicians will need to bring this aspect out. Paying taxes is a national duty. Do your bit should be the message.
Not* a policy problem.
The direct personal tax cuts probably have a better retention rate, but still have a low multiplier effect on GDP. Until we can address the root cause of stagnated/reducing private capital formation, we won't be able to spur growth in the medium term. I think the corporate tax cuts misdiagnosed the problem as 'lack of capital' to invest, rather than seeing it as 'business not having an incentive to invest'.
Well put, Prem!
Excellent article. The corporate tax cuts are similar to what happened in USA in Mr.Trump's first term and the tax cut mostly went into share buybacks(same story). About the tax under litigation I think it would be very very hard. For example Volksswagen India made a net profit of about 36 million USD and suddenly the GOI is putting up a notice of 1 billion USD. Not only will Volkswagen not pay, It cannot PAY. There are many such litigations where people beleive the GOI is just greedy to rip off the corporates. Yes the CEO part , that will lead to income inequality.
Nonetheless I beleive consumption growth will happen when real incomes actually rise. My understanding is that the 1 lakh crore injection is just shifting money from govt capex to people. I think small buisnesses which evade taxes should be taxed and made to pay(though I agree I don't know how). It is not easy to hide billions of tax dollars of corporates.
Very well summed up.
If the corporate tax reduction has not had an effect, why is the government not increasing that and using that to offset the income tax cut? Valuations of companies may suffer perhaps, but the good ones will become more efficient or productive. And it is not as if valuation corrections will not happen, as we speak it seems to be ongoing.
Good question. I should have addressed this in the article itself.
The thing is, just like US interest rates control interest rates around the world, the US corporate tax rate controls global corporate tax rates.
The US lowered its corporate tax rate in 2018. Other countries, including India, had to follow suit to stay competitive; otherwise, companies would simply shift to the US, and we would lose out on foreign investment. Many Indian companies also have their headquarters in the US but do all their operations in India. This is called Base Shifting.
If you were a company what would you choose:
a) The world's largest economy with business-friendly norms and the most freely convertible currency charging you a 21% tax rate.
b) A developing country with not-so-business-friendly norms and a managed capital flow, charging you a 30% tax rate.
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great details. Can you comment on past tax slab changes and its impact on consumption across sectors and impact on economy?
Well explained article !!
Tnx Shashank