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Editorial

Booster Shot Corporate tax is cut; now cut personal taxes

September 21, 2019 06:09 AM

COURTESY TIMES OF INDIA EDIT SEPT 21

Booster Shot
Corporate tax is cut; now cut personal taxes
The headline corporate tax rate was cut yesterday through an ordinance by eight percentage points, to 22%. It’s a bold step that seeks to unleash animal spirits by boosting sentiments, in an economy weighed down by weak aggregate demand. The new tax rates are optional. Companies can shift to it provided they forego all tax exemptions. Consequently, government avoided a mid-year disruption but provided a roadmap. Along with tax rate cuts, enhanced surcharges introduced in the budget on capital gains have been rolled back.

The cut in headline rates for existing companies and an even lower rate of 15% for fresh investment in manufacturing represent a fiscal stimulus; it may lead to Rs 1.45 trillion of revenue foregone. However, the announcement should also been seen as a structural change. India needs to compete with Asian emerging markets for investment. At 22%, the headline rate is between that of Vietnam and Indonesia. The move had a mixed impact on capital markets. Stock indices surged but so did interest rates on debt as the fiscal deficit is likely to widen. However, the step is the right one as a big announcement was needed to change the mood and yield better revenues in the medium term.


Bringing in surcharges and cess, the effective corporate tax rate today is about 25.17%. There is a stark difference between corporate tax rate and the top marginal tax rate of almost 43% for personal income. Given that private consumption growth is trailing overall GDP growth, the effort to boost demand must encompass a cut in personal tax rates. It will complement today’s announcement and cost far less in terms of revenue foregone. The combined impact of corporate and personal tax cuts, aided by RBI’s monetary loosening, may be the booster needed to reverse the 18 month long loss of economic momentum. This is not the time to hold back.

 
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