Corporation Tax Cut: Who Bears the Burden?

Finally, with the corporate tax cut, the government has admitted that the slowdown in the economy is real and is no longer merely a cyclical phenomenon. While markets continued to be in a bear hug even after keeping the surcharges on high incomes from foreign portfolio investors (FPIs), liberalising investments in single brand retail, opening up of coal mining for 100% foreign investment and the consolidation of public sector banks, the reduction in the corporate tax rates announced on 20 September 2019 was cheered by the stock markets.

The best practice approach to tax reform is to broaden the base and reduce the rate. This is particularly important for corporate income tax as capital has footloose mobility and can easily migrate in search of, ceteris paribus, lower tax regime. By that reasoning, the government should have carefully worked out a strategy to phase out various tax concessions and deductions in the corporate tax structure before reducing the rate. The promise of the previous finance minister to reduce the rate to 25% five years ago was essentially predicated on that strategy. However, the government was in a hurry to do something to revive the investment climate and decided to cut the tax rate to 22% conditional on the companies not availing tax concessions. There will be transitional issues to decide on the eligibility and issues of aligning the tax on small businesses that pay at much higher individual income tax rates. Furthermore, if the objective was to broaden the tax base, it makes little sense as to why minimum alternate tax (MAT) was reduced from 18% to 15%.