Corporate Tax

Can a worldwide minimal corporate tax play a vital function for India?

A few years ago, the then Indian Finance Minister Arun Jaitley announced in the Union budget that the tax rate for companies that do not claim exemptions will be only 25 percent instead of the current tax rate of 30 percent.

In the past, governments had made arrangements for huge tax breaks to encourage investment. Although the corporate tax rate is 30 percent, the effective corporate tax rate is no more than 22 to 23 percent. In such a situation, even after lowering the tax rate to 25 percent, there was no loss to the treasury. This move was considered important as India was removed from the list of high taxing countries in such a situation. This move was seen as progressive.

The next finance minister, Nirmala Sitharaman, announced in her budget speech that old companies that do not benefit from tax exemptions only have to pay a corporate tax of 22 percent and new companies only have to pay a tax of 15 percent. (Note that there is a 10 percent surcharge and a 4 percent reduction in health and education for these tax rates.)

Also read: Jeff Bezos supports the corporate tax hike by the Biden administration

In terms of the global perspective, India has felt that the corporate tax rate is very high here, which is why investors are moving away from India.

In fact, this may be true to some extent as the tax rate was lower with other competitors to India. It is noteworthy that the corporate tax rate is 17 percent in Singapore, 25 percent in South Korea, 20 percent in Vietnam, 21 percent in the US and 25 percent in China, but only 15 percent in the high-tech industries.

That said, the corporate tax rate cut in India was justified as corporate tax in other countries was much lower than in India.

By lowering this tax rate, India has now become one of the lowest corporate tax countries in the world. Indeed, the process of lowering corporate tax rates due to competition to attract foreign investors has been going on around the world for some time.

In fact, countries like America did not lag behind in this race, and then-US President Donald Trump cut the corporate tax rate to 21 percent.

The general feeling is that those who have lower corporate taxes will attract more investors. However, this step by the countries proved counterproductive as almost all major nations lowered the corporate tax rate.

It’s worth noting that corporate income tax is a large part of total government revenue. In such a situation, if investments increase less than expected due to lower corporate taxes, government revenues will of course be affected.

Governments today have to spend a lot on social services and infrastructure. As a result of this lowering of the corporate tax rate, corporate profits after tax are substantial, but government income is also falling significantly.

It is worth noting that in India, corporate tax makes up about 25 percent of total central government tax revenue. This means that instead of 25 percent corporate tax in the past, the tax rate has now been reduced to 22 percent, reducing potential corporate tax income by at least 12 percent.

Significantly, to date only a small portion of government spending is available for social services, including education, health, drinking water, women’s development, planned caste, and planned tribal development.

In the previous budget it was only 9-10 percent of total government spending. Similarly, the country also has to spend a lot of money on infrastructure in order to grow faster and promote the well-being of the people.

Also Read: Corporate Tax Prepayments Up 49% In FY 2021 Third Quarter

However, without resources, the government cannot spend more money on infrastructure, even if it wants to. However, if government revenues are affected, it is incomprehensible how spending on these items will be increased.

Most importantly, neither consumers nor the government benefit from lowering taxes on businesses. This only increases the after-tax profits of the companies and the wealth of the wealthier owners of the companies.

It can be argued that companies will increase their investments when they have more money, but the experience of the last 10 years has shown that companies today are not ready to increase their investments despite having a lot of cash in hand.

Not only that, according to a recent report, many rich people are leaving the country and transferring their wealth abroad. This is a major concern.

Although then-US President Donald Trump cut corporate tax, the new President Joe Biden recognized his predecessor’s mistake and announced an increase in corporate tax from 21 to 28 percent.

In a world where there is competition between countries to competitively lower corporate taxes due to the rush to attract investment, the US also fears that investors may leave the country.

At the same time, while U.S. President Joe Biden says a corporate tax hike will do no harm to the economy, his administration has lobbied internationally to halt the trend of competitive corporate tax cuts that has continued for the U.S. for the past 30 years.

US Treasury Secretary Janet Yellen recently said she was in talks with a group of G-20 countries to reach an agreement on minimum corporate tax internationally.

These US efforts should be supported by all member states beyond short-term considerations, as the competitive cut in corporate taxation will have an impact on spending on social services and infrastructure, which will only harm the public and the economy of the country.

Significantly, the US president’s attempt to raise corporate taxes is an important part of his ambitious $ 2 trillion infrastructure plan.

Also read: Direct tax collection of 5% to 9.45 billion rupees in fiscal year 21: CBDT

The need of the hour is to have a stable tax system so that governments are not deprived of revenue and the provision of the necessary social services and infrastructure is not hampered.

The US has also made it clear that the government will take precautions so that companies do not send their profits to other countries or “tax haven” nations after tax increases.

These efforts by the US government must be supported to build consensus among G20 countries to raise corporate tax rates and end the race to lower corporate taxes in the world so that the pandemic-ridden world can get out of the economic troubles quickly and development efforts can be accelerated in any country in the world.

In such a situation, if the minimum corporate tax rate is set at 30 percent worldwide, the infrastructure of all countries will be boosted and post-pandemic development will accelerate.

However, a sales-based alternative minimum tax (MAT) should also be in place to prevent the transfer of profits from one place to another and avoid countries from which they do business.

For example, Google, social media companies and other tech companies avoid taxes in India by not reporting profits in the country. The Indian government needs to curb this practice by introducing MAT. If we are trying to reach global consensus on the corporate tax rate, international consensus on MAT is also important.

(The author is the National Co-Convener of Swadeshi Jagaran Manch and Professor at PGDAV College, University of Delhi.)

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