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How Will Deduction In Corporate Tax Help Customers In Monthly Income

The finance minister’s recent announcement on the significant cuts in Corporate Tax and the introduction of new tax rates for any new manufacturing units at 15 per cent is considered to be the lowest in a long time.

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This is not an attempt to support or disapprove the latest debate on economic slowdown in India. However, some of the facts and latest projections, such as GDP and views of some of the prominent personalities in this field cannot just be ignored. The IMF (International Monetary Fund) had earlier cut its projection for India's economic growth by 0.3 per cent points to 7 per cent for the fiscal year 2019-20, owing to the "weaker-than-expected outlook" for the domestic demand. RBI on October 4, 2019, also lowered India’s GDP growth estimate from 6.9 per cent to 6.1 per cent due to ongoing economic slowdown and also cut down repo rate by 0.25 bps to 5.15 per cent. 

Now, all these details might sound confusing to a lot of people and some of them might also end up questioning its relevance to the main theme of how corporate tax deduction will help the customer in monthly income. However, there is nothing to be confused about, as all the above facts and numbers are of utmost relevance to the primary subject. The economy grows, when consumptions increase and in an economy, if consumers do not have sufficient disposable income, they tend to either reduce or contain their consumptions. The way to roll back and increase consumptions is to increase the disposable income in the hands of consumers, either by increasing the income in their hands (demand side) or by reducing the prices of the goods and commodities.

The finance minister’s recent announcement on the significant cuts in Corporate Tax and the introduction of new tax rates for any new manufacturing units at 15 per cent is considered to be the lowest in a long time. However, following this move, a new question that arises in minds of people is - Why has the government reduced the corporate tax rates as it may result in a revenue loss of 1.45 lakh crore? 

There seem to be three main reasons for the same, with an underlying reason: overall economic growth. 

  • India’s Corporate Tax rates were amongst the highest in the world and by reducing the same it is expected that the country is now going to attract more foreign investors and that will help in giving a boost to the economy through employment and then consumptions.  

  • Once corporate start saving money on tax, they will spend that money on expansion and that again will positively impact the employment and then consumptions.  

  • The reduced corporate tax rate will reduce the burden in the hands of corporates and this reduction in cash flows can be passed on to the ultimate consumer.  

Increase in customer’s monthly income: Actually this will be the indirect impact on consumer’s monthly income or simply income. But there is a possibility of its direct impact as well. That is, if the reduced expenses resulted from the reduction in the tax rate, is passed on to the employees as increased salaries and compensation. However, this is very unlikely, as most of the time, such benefits are likely to be passed on to consumers indirectly through reduction in prices. 

Indirect impact on customer’s income is more likely, as reduced tax rates will increase the profits in the hands of companies and they are expected to pass on these to consumers by reducing the prices of the goods and commodities. 

Consumers will either find these goods and commodities more affordable or they will increase the consumption because of the reduction in price, or they will be able to save more, thus leading to increase in either overall consumptions or household savings. Both of these are expected to have a significantly positive impact on our economy, and thus take us out from this slowdown. 

The government, most likely, is of the views that the reduction in corporate tax and its domino effect will lead the consumers to gain some indirect benefits, which will increase consumptions/savings, and will eventually help the overall economy to flourish and grow further. 

However, while the corporate tax reduction impacts the supply side of the equation, a supplementary initiative of reducing individual tax rates, to incentivize and increase demand, would be a welcome move, thereby increasing the disposable income in the hands of consumers.             

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
corporate tax gdp imf economic slowdown

Tarun Rustagi

The author is Chief Financial Officer, Canara HSBC Oriental Bank of Commerce Life Insurance

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