Bold Tax Move Needs Matching Reforms

Policy consistency and other enabling supply-side measures can build on corporate tax breaks

- VENKY VEMBU

In the first flush of over-the-top corporate and stock-market euphoria following the dramatic announcement on Friday of sweeping cuts in corporate taxes, it is easy to forget that barely a month earlier, Finance Minister Nirmala Sitharaman had, in effect, been arguing against herself. A 25 percent tax rate for all corporates, she had said as recently as in early August, must await a time when there was “revenue buoyancy”.

Her articulation of such a dampening sentiment — that the government would be unable anytime soon to deliver on its promise of lower corporate taxes — had done such a masterly job of ‘expectation management’ that heads of industry had reconciled themselves to the inevitability of high taxes and been reduced to petitioning her for lowly tweaks of GST rates.

But even the government’s steady dribble of ‘stimulus’ measures in recent weeks had proved largely ineffectual in arresting the downward spiral of business sentiment. In fact, a certain surliness of spirit had begun creeping into industry-government interface, with one outspoken corporate titan even suggesting — erroneously — that Sitharaman was perhaps holding forth on matters beyond her Ministry’s ken.

Which is when, in the proximate context of Prime Minister Narendra Modi’s high-profile visit to the US, the government went ‘all in’ with the dramatic announcement of corporate tax cuts, bringing them down to levels that are competitive with other jurisdictions.

There is never a bad time to do the right thing, of course. And consistency of outlook is sometimes an overrated virtue, particularly if that original outlook placed a premium on heavyhanded tax extraction.