The federal states derive a significant part of their income from corporate income tax. Lower income means the government can spend less on education, health, drinking water, women’s development, etc.
Most importantly, neither consumers nor the government benefit from a corporate tax cut; this only increases the companies’ after-tax profits and increases the wealth of the already wealthy company owners. Image: Pixabay
In June 2021, the G7 finance ministers agreed in principle on a uniform minimum corporate income tax rate as part of the global tax reforms; and oblige multinational corporations to pay taxes in the countries in which they operate, not just where they are headquartered. Following the G7 proposal, the G20 has already taken up this issue and preparations for the new global tax regime have already begun. It is noteworthy that this proposal was first discussed by the US. It is expected that if these proposals get through and come about in the form of an agreement, it would significantly increase tax revenues in all nations, including India.
Competitive corporate tax rates
A few years ago, the then finance minister of India, 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 previous 30 percent. Significantly, in the past, governments had made arrangements for huge tax breaks to encourage investment. So even though corporate tax was 30 percent, the effective corporate tax rate was no more than 22-23 percent. In such a situation, even after the tax was reduced to 25 percent, there was no loss for the treasury. This step was considered important as India was removed from the list of high tax countries in such a situation. This move was seen as progressive as it would help attract more businesses into the country and encourage foreign direct investment (FDI) influx.
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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 22 percent corporate tax and new companies only have to pay 15 percent tax. (Note that there is a 10% surcharge and a 4% health and education deduction for these tax rates). From a global perspective, India has the impression that the corporate tax rate is very high here, which has an impact on investment. This may be true to some extent as the tax rate has been lower in other countries competing with India to attract investment.
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 United States, and although it is 25 percent in China, the communist regime there levies only 15 percent tax on high-tech industries . That said, the corporate tax rate cut in India was justified because the corporate tax rate in other countries was much lower compared to India. By lowering this rate, India became one of the countries with the lowest corporate taxes in the world. In fact, the process of lowering corporate tax rates due to competition for 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 opinion is that countries with lower corporate taxes will attract more investors. But this step by the federal states actually turned out to be counterproductive, as almost all large countries lowered the corporate tax rate. It’s worth noting that corporate income tax makes up a large part of the state’s total 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 reduction in the corporate tax rate, companies’ after-tax profits have increased significantly, albeit at the expense of government revenues. It is worth noting that corporate income tax in India represents about 25 percent of the total tax revenue of the Union government. This means that if the corporate tax rate has historically been reduced to 22 percent instead of 25 percent, the potential corporate tax income will be reduced by at least 12 percent.
Governments need money to meet their social obligations
Significantly, only a small part of government spending is still available for social services, including education, health, drinking water, women’s development, and planned caste and tribal development. In the previous budgets, it was only 9 to 10 percent of total government spending. Similarly, the country also has to spend a lot on infrastructure to achieve faster growth and human wellbeing. But due to a lack of resources, the government can no longer spend on infrastructure, even if it wants to. If revenue is concerned, then how can we expect governments to increase spending on these items?
Most importantly, neither consumers nor the government benefit from a corporate tax cut; this only increases the companies’ after-tax profits and increases the wealth of the already wealthy company owners. It can be argued that companies will increase their investments when they have more money, but the experience of the last 10 years shows that companies today are not ready to increase their investments despite large cash reserves. In addition, according to a recent report, many rich people are leaving the country and transferring their wealth abroad. This is a major concern.
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Additionally, we know that economies have been hit hard by COVID-19 restrictions. This has created huge holes in government revenues. For example, India’s budget deficit exceeded 10 percent of GDP in the last fiscal year, the US recorded a deficit of 14.9 percent, the UK missed 16.9 percent, while the euro zone was 7.2 percent. The need to spend more money in the post-COVID era could make the scenario even bleak for countries. If the current proposal to reform the global tax system goes through, it can boost government revenues around the world.
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. But in a world where countries are competing to cut corporate taxes to get more investment, the United States also worries that investors might leave it. Although Biden says increasing corporate tax rates will not harm the economy, his government began lobbying internationally to halt the trend of competitive corporate tax rate cuts that has persisted in recent years.
US Treasury Secretary Janet Yellen recently said she was in talks with a group of G-20 countries to reach an international agreement on minimum corporate tax. These U.S. government efforts should be supported by all member countries beyond short-term considerations, as the competitive cut in corporate taxes has started to hit spending on social services and infrastructure, only hurting the community 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. The need of the hour is a stable tax system so that governments do not lack income and there are no obstacles to providing the necessary social services and infrastructure. The United States has also made it clear that the government will take precautions so that companies do not send their profits to other countries or “tax havens” after tax increases.
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It is necessary to support these efforts by the US government to reach consensus among G20 nations on raising the corporate tax rate and ending the race to lower corporate taxes in the world so the pandemic-ridden world can come from its economic problems and development efforts in all countries can be accelerated.
In such a situation, if the minimum corporate income tax rate is set as proposed and another pillar of global tax reform, namely the collection of taxes from companies in which they operate, not just in their home country, is adopted globally, the development is the Infrastructure of all countries will get a boost.
According to the UK Tax Justice Network, the G7 countries would gain $ 168 billion with these changes to the global tax system, while other countries would gain $ 107 billion annually. India will also benefit significantly from these changes. India is likely to benefit from new proposals as international tax rules currently favor the developed countries, which are where most of the multinationals are from. These rules restrict the taxation rights of developing countries and favor industrialized countries as recipients of income from developing countries. This grossly unequal system is also likely to disappear with the implementation of new proposals.
Reservation for India
Several technology and e-commerce companies, despite flourishing businesses, pay no significant taxes by finding loopholes in international tax laws. There is a growing belief that a minimum sales-based alternative tax (MAT) should also be introduced to prevent the shifting of profits from one place to another and to avoid countries where they do business. For example, Google social media companies and other tech companies avoid taxes in India by not reporting profits in India. We need to curb this practice by imposing MAT. If we are trying to reach global consensus on corporate tax rates, international consensus on MAT is just as important.
(The author is National Co-Convener of Swadeshi Jagaran Manch and Professor, PGDAV College, University of Delhi)
(The federal government seeks to represent views and opinions from all sides of the spectrum. The information, ideas, or opinions in the articles are from the author and do not reflect the views of the federal government.)