Dear FM, Here Are 3 Tax Cuts the Common People Would Welcome More

Dear FM, Here Are 3 Tax Cuts the Common People Would Welcome More

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Finally. Finally! The Modi government has acknowledged the futility of trying to pump prime India’s GDP by ever-escalating government expenditure, which increased by an astonishing double-digit CAGR (compounded annual growth rate) over six years of impotent growth. Remember, Indian governments drive only 10 percent of our economy – worse, they do so inefficiently and bluntly.

Finally, the Modi government has acknowledged that the budget presented on 5 July 2019 was a failed, vapid policy document.

Finally, it has realised that India’s private enterprise is the most potent engine of economic growth, accounting for over 90 percent of GDP.

And finally, after six excruciating years, it has shed its “I am the government and I can fix everything” stance and adopted the mantra of “I will free your animal spirits by empowering, trusting and enriching you.”

Finally!

Also Read : Tax Cuts Are Terrific, But Should Have Gone Directly to People

The fiscal giveaway is an awe-inspiring 0.6 percent+ of GDP. Absolutely, it’s a generous Rs 1.45 lakh crore of additional cash created on corporate balance sheets. Optically, it’s a humongous 10 percentage points’ hack of the corporate tax rate by one swing of the axe (reminiscent of P Chidambaram’s audacious move in the “dream budget” of 1997/98 – ouch!).

Yes, I am delighted. But no, I am not ecstatic. Why? Here are three reasons:

  • Large Indian companies have never quite paid the peak rate of 35+ percent. Most utilise a welter of complicated exemptions to pay, at best, anywhere between 18-29 percent tax on profits. Therefore, in reality, they could end up saving no more than 2-5 percent of profits. To put it in perspective, a company earning Rs 50,000 crore of pre-tax profits would have an additional Rs 1,000-2,500 crore to play with. Now that’s not a piffling sum of money, but neither is it revolutionary
  • Will this ignite a consumption boom? Here is where I track away from the euphoria. The government has chosen to give additional cash to companies, but not directly to consumers. This cash will ultimately reach ordinary people, but in a rather convoluted way – when companies cut product prices, or declare dividends, or buy back their shares, or invest in new projects – and there will be leakages along the way. Nonetheless, this cascade of cash through the economy deserves applause, even if it’s not a roar or thunderclap
  • So, was there a better way of injecting this stimulus? Yes. Imagine if the cash was squirted directly into consumers’ pockets, rather than meandering its way to them. How?

Also Read : How Will The Corporate Tax Cut Benefit the Common Man?

Well, here’s how Rs 1.45 lakh crore would have given a bigger booster. Imagine if the government, instead of giving more cash to companies, had cut the following taxes, which would have enriched ordinary folk, directly and immediately:

  • Abolished the 28 percent GST-slab for most key items, including cars. With one stroke, popularly purchased items would have become materially cheaper, kick starting the virtuous consumption/investment cycle
  • Abolished the Long-Term Capital Gains tax on equities, as existed before the Modi government slammed a hostile regime on risk capital. In one go, a previous injustice would have gotten undone, making equities sexy once more
  • Abolished the Dividend Distribution Tax – this would have killed the hugely unfair “double taxation” of dividends, in the hands of the companies, and again clubbed with shareholders’ incomes. Once again, investors would have instantly got more cash to spend and invest.

Also Read : Modi hails FM, says corporate tax cut to attract investment

While we could not figure out what the revenue loss would be if these three taxes were cut, my bet is that the loss would be in the vicinity of Rs 1.50 lakh crore, give or take a few thousand crores, which is quite immaterial when you are mounting change on this scale.

What’s more, I can bet my last penny that the consumption/investment impact of these three tax cuts, putting cash directly in the hands of ordinary people, would be a multiple of what will eventually be achieved by the current cut in corporate taxes.

Any takers for this wager, especially on Raisina Hill (office of the Ministry of Finance)?

Also Read : Tax Cuts Signal Modi Govt’s Change in Mindset Towards Pvt Sector

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