Corporate Tax - Some Gain, Some Pain

The reduction in corporate tax uplifts sentiment, but is unlikely to give any gains to consumers

- K. Sunil Thomas

For a thirsty traveller in a desert, an oasis can be a life-saving sight. It could also be a mirage—the desert light playing tricks with your eyes, creating an optical illusion when there is actually nothing but endless expanse of sand. The question many have been asking over the past few days is whether the ‘mini budget’ bonanza of the Union government is a panacea to the ills plaguing the Indian economy, or just optics.

On September 20, Finance Minister Nirmala Sitharaman, in her latest slew of measures to reinvigorate the Indian economy, unleashed what some termed a ‘silver bullet’—a dramatic cut in corporate tax from 30 to 22 per cent. This meant that after adding cess and surcharges, the effective tax an Indian company would have to pay dropped from 34 per cent to 25.17 per cent. Additionally, the series of amendments to the Income Tax Act 1961 and this year’s Union budget through an ordinance the same day saw the effective tax payable by a new company (set up from next month and starting production within end-March of 2023) at 17.01 per cent (15 per cent tax plus surcharge and cess).

While there have been significant cuts in corporate tax earlier—P. Chidambaram cut it down to 35 per cent in his ‘dream budget’ of 1997, spurring the economy to robust growth in the ensuing years— the significance this time is perhaps more, with consumer spending dropping to a trickle, manufacturing sector slowing down and tax revenues showing a shortfall.

Though the loss of an estimated ₹1.45 lakh crore of revenue because of this tax cut will add to the government’s overall fiscal deficit, Sitharaman was quick to allay fears, saying that she hoped the measures would offer a fillip to growth and thereby make up for this loss.