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Welcome tax cut, but for the wrong persons PDF Print E-mail
Saturday, 21 September 2019 00:00
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Shobhana column 

 

The sharp cut in the corporation tax rate can be a big talking point for prime minister Narendra Modi on his visit to the US that begins today. But, back home, the government’s giveaway of Rs 1.45 lakh crore will benefit only those already doing relatively well—the corporate sector and rich individuals. The anticipated investments from the tax-break could take a long time—at least a couple of years—to materialise. Meanwhile, with consumption demand crimped, the economy will continue to crawl.

Indeed, industry will wait to see a clear uptick in demand before it puts money to work; those business houses that were expanding, have done so by picking up distressed assets via the IBC route. At a time when demand has slumped, job losses are rising, and there is already surplus capacity available, there is little incentive to invest. The other problem is the lack of risk-appetite on the part of lenders, given Indian companies remain highly leveraged. Only those promoters who are able to cough up contribution to the equity of a project are likely to get financial backing for a greenfield project. And, there are not that many.

Looking for money in the stock market is tricky. There could be some brownfield initiatives, with promoters using their cash-flows—money saved from the lower tax rate. However, this is unlikely to create too many new jobs or a meaningful increase in demand. Given the pace at which companies are automating, they are likely to spend more on technology. The immediate issues of weak demand, limited liquidity and a shortage of equity capital, therefore, will not get addressed. Hopefully, industrialists will not return the excess cash to shareholders through buybacks—now that the tax on this has been withdrawn—or pay out hefty dividends.

The 15% tax for new investments post October is a red carpet invitation for global players. Will foreign companies come in? They may, because the 15% rate is very attractive; an Apple, for instance, could be tempted to set up shop in India. The question is how much FDI will come in, how soon, and whether the government could have kick-started the economy—which is really what is needed—some other way. A demand-side stimulus would have worked better rather than a supply-side measure. A cut in taxes for individuals—below a certain income level—coupled with some cuts in GST would have spurred consumption. After all, the state governments stand to lose revenue—even by way of corporation tax cuts too. With more purchasing power driving household spending, companies would have seen higher revenues. That, in turn, would have boosted cash-flows and profits.

Right now, a cut in corporation tax does little for the economy. It will not help the near-term momentum, and could have come a year down the line. That’s because it is highly unlikely companies will pass on the gains from the lower tax rate by trimming prices of products—the automobile companies are all sitting on cash, but they have not brought down the price of cars or two-wheelers meaningfully; they offer discounts in the form of free insurance or cuts in some fee or other. Moreover, the surpluses need to be accumulated before they are invested. As the government has been saying, many companies have not even passed on the cuts in the GST rates.

Most of the gainers are large profitable multinational consumer giants and profitable private sector banks; an HDFC Bank, a Nestle, a Colgate or an ICICI Bank are already doing well and didn’t really need the break. Multinational consumer goods companies are unlikely to make big investments, they have incurred very little capex all these years. It is true, companies today may not be reporting the kind of numbers they were doing a few years ago, but most of them are fairly profitable even if the aggregate profits have fallen in Q1FY20.

Instead, relief for the middle-class—an individual who earns Rs 10 lakh per annum and pays a hefty 30% tax rate—would have worked better. Rising consumer spends would have yielded the government higher revenues. But, with incomes not going up and expenses on key areas such as health and education not coming down, consumers are cautious. If revenues don’t pick up, and the government needs to curb capex to keep the fiscal deficit within limits, it will keep the economy sluggish. Already, the tax-cuts will mean a loss of revenue, and may force some expenditure cuts—on capex—by both the Centre and the states. The yield on the benchmark rose to 6.8% on Friday on fears that the deficit could slip and the government could borrow more from the bond markets. That, then, would drive up interest rates and crowd out the private sector.

One finds it hard to understand the tax-breaks for the affluent, since less than 3% of India’s population invests in shares or mutual funds. It was not necessary to remove the tax on buybacks, nor to withdraw the enhanced surcharge on the capital gains tax—the ‘wealth effect’ only benefits the wealthy. And, the money will be spent on foreign cars, imported goods and holidays abroad. If the idea was to boost the sentiment with an eye on the disinvestment target, putting more money in the hands of consumers would have been better. It would have been a more inclusive Diwali gift.

 

Last Updated ( Monday, 23 September 2019 05:56 )
 

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