Budget |Maximum revenue, minimum tax|2020

Budget:Budget 2019-2020 has brought a major change in both personal and corporate direct taxes. It is likely that before the budget for the year 2020-21 is presented, the government should accept the Direct Taxes Code report and like the excise duty, the direct tax also gets out of the budget. In the budget, the corporate tax rate (CTR) has been reduced from 30 percent to 25 percent for all companies with a turnover of Rs 400 crore. Earlier this limit of 25 percent was applicable to companies with turnover of Rs 250 crore. The Finance Minister said that 99.3 percent of India’s companies will now be under its purview. Although it is not clear what percentage of these 99.3 per cent companies will contribute to the total corporate tax, there is speculation that it will be just 10 per cent.

Report of the Organization for Economic Co-operation and Development (OECD)
There is always a situation of discussion and debate about tax rates, this time it is being discussed more. In the year 2018, President Donald Trump reduced the corporate tax rate (CTR) for America from 21 percent to 21 percent. It is known from the chart that Trump has appropriately determined the lower tax rate as it is near the optimal tax rate.

corporate tax rate
corporate tax rate

The Organization for Economic Co-operation and Development (OECD) has recently released detailed data on corporate taxes in about 100 economies. The data confirms the concern that had long been feared that the corporate tax rate in India is one of the highest tax rates in the world. According to the OECD, the Effective Corporate Tax Rate- ECTR is also the highest in India and exceeds by a large margin from other economies. The OECD has listed the ECTR as 44 percent for India.


Effective corporate tax
(Effective Corporate Tax Rate- ECTR)

Effective corporate tax includes all types of taxes paid by corporate companies in various countries (eg corporate tax, dividend tax, capital gains tax).

The second highest effective tax rate is Argentina, which is 9 percentage points lower than India’s tax rate and France is ranked third with an effective tax rate of 11 percentage points less than India. China’s effective corporate tax rate is 23.6 percent and is 20 percentage points lower than India’s rate. Is this also a reason why China has been getting more investment and development than India?

A cursory glance at the Laffer curve given above reveals many things.

  • The OECD’s comparative data for the year 2017 is evident from the inverted U-shaped curve and this inverted U-shape reveals a nearly normal distribution (denoted by the red line in the chart).
  • The minimum bounce of tax (in dollars) is visible in India, presumably because tax rates are determined on the basis of morality rather than receiving maximum revenue. In India, we tax at the rate of 44 percent for 3.5 percent tax revenue (as a percentage of GDP). South Korea, Israel and many other countries get this same revenue from half of India’s taxation level. As seen in the chart, the tax rate level at which maximum revenue is obtained is 23 percent. This is only half of India’s tax level.


Laffer curve
The non-linear relationship between tax rate and tax revenue (as a percentage of GDP) is revealed by the Laffer curve – the attainment of zero tax revenue at zero tax rate and zero tax revenue at 100 percent tax rate. Attainment. Arguably reasonable tax rates reflect maximum revenue growth, but tax rates tend to decline in the same proportion if tax rates are excessively high or low.


Economic growth and measures

corporate tax
corporate tax


In the era of globalization, no country is a separate entity. Competition is influenced by tax rates, interest rates, exchange rates, and labor costs. Currently, the move towards prosperity with the devaluation of currency is no longer a successful approach. In the two decades of 1990–2010, China benefited greatly from such heavy devaluation. Due to such interference in currency, China’s success ensured that further Western powers would not allow it to any other country. The trade war of the Trump administration may be considered to be the result of China’s exchange policies.

Trade war
When one country adopts a protectionist attitude towards another country i.e. increases the duty on goods and services imported from there, the other country also retaliates. The effect of such protectionist policies is called Trade War. It begins when a country’s trade policies of another country seem to be contrary to its interests or that country raises duties on imported goods to promote domestic manufacturing for employment generation. When a trade war breaks out between two countries, it also affects other countries.

The question is, what can different countries do now to improve their competitiveness? They can reduce their capital costs, make labor and industry more competitive and rekindle their animal spirits.

Animal Sprits
The term Animal Spirits was first used by John Maynard Keynes in his book ‘The General Theory of Employment, Interest and Money’ written in the year 1936 with reference to economics. It refers to the confidence and hope displayed by consumers and businesses in difficult times.

The latest budget has moved in the right direction in the area of ​​capital cost reduction and competition in labor and industry. The time has also come to implement the idea of ​​Sovereign Bond debt, even if some experts oppose it. The fear of inflation has now been eradicated from the world including India. Some economists and experts still do not consider the repo rate cut to be correct. But the rate of economic growth in India was the best between 2004-2011 and the then rates were less than the present time. In such a situation, the pace of GDP can be increased by reducing the repo rates. After the appointment of RBI Governor, there has been a significant improvement in communication between RBI and banks and policy rates have come down gradually. However, the actual repo rate still needs to be reduced further. The issuance of sovereign bonds can help with this, although one should not expect any accelerated growth in GDP growth. Changes in the exchange rate are no longer being implemented and the currency policy is sluggish in its implementation and impact. Thus, the only option for development for Indian policy makers is to cut tax rates at internationally competitive levels. This objective can be met by reducing the corporate tax rate (CTR) to 22 percent for all companies.

How effective is the income tax increase

tax rates
tax rates


In the latest budget, the rate of personal income tax (PIT) has been increased. Raising this rate to the level of developed countries cannot be considered an appropriate step. It seems that the tax policy of the government seems to be going towards the old morality of taxing the rich more than the maximum collection of revenue. With this measure, the government can recover a maximum of Rs 5,000 crore from the rich, while the target of personal income tax collection of Rs 5 lakh crore has been set in the budget. It is also possible that this goal cannot be met because tax evasion can reduce personal income tax recovery. Generally tax rates are determined to maximize tax revenue and tax revenue depends on both income and tax compliance. Tax compliance means that more and more companies are depositing taxes or disclosing their actual income almost fully. Larger resource mobilization can be ensured through taxation only by improving tax compliance and this will not require any increase in tax rate, in fact it can be motivated more by reducing tax rates.

Why is the effective tax rate in India so high?

tax rate
tax rate


Companies in India have to pay a corporate tax, along with a surcharge and an additional 15 percent dividend distribution tax (DDT). The revenue collected from the dividend distribution tax is modest compared to the overall tax revenue received from corporate tax. Estimates show that the revenue collected from the dividend distribution tax is only 8 percent of the total corporate tax revenue. An inappropriate dividend distribution tax of 15 percent discourages companies from distributing dividends among shareholders. Along with this, there is the problem of double taxation where morality based (tax on the rich) is levied another tax. If a person receives more than 10 lakh rupees as dividend income, then he has to pay an additional 10 percent tax. Thus tax is levied thrice in India on the same income and this happens only in India in the world.

The conclusion


The Budget and Economic Survey both focus on the improvement of private investment for sustainable long-term development. Tax rates need to be cut to increase investment and help India build a $ 5 trillion economy. There is a greater emphasis on revenue collection than increasing tax rates. Higher tax rates may only be able to increase the tax to a certain extent as indicated in the Laffer curve that after this limit, tax collections begin to decrease. This not only reduces tax collection, but also reduces investment and the industry is also negatively affected. If the government gradually rationalizes taxes according to the OECD report, this will increase investment in the coming years, which will give a boost to the economy and also increase tax revenue.

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