FM must slash income tax rates, only way to stimulate demand
December, 23rd 2019
Given the need of the hour is to boost spending, cutting income tax rates would put some money in consumers’ pockets.
Vikram Kirloskar’s advice to the government that personal income tax (PIT) cuts can wait and that it should focus on other areas comes as a shock. On second thoughts, not really. India’s corporate sector is known more for being greedy than for being generous, ever reluctant to share any benefits with consumers and always happy to retain all the gains. The government recently slashed the corporation tax—from 30% to 22%—a bonanza if ever there was one. But, that is not enough. After all these years, India Inc still wants to be protected from global peers since it is not able to compete with them. Both the Bombay Club, and later, the Bangalore Club, complained bitterly of how global competition was hurting, insisting the rules be written so as to ensure Indian industrialists always got a better deal.
So, individuals—salaried employees, primarily, since they are the ones actually paying taxes while the professionals merrily evade them—don’t deserve a tax break. Someone earning just `10 lakh per annum must pay tax at the rate of a staggering 30%. But, the dividend distribution tax must go—else, how do industrialists, who are the biggest beneficiaries since they are the ones who earn the dividends from their equity holdings, to make ends meet?
The largesse doled out in the form of the corporation tax should be taken back. The FM would do well to roll back the corporation tax cut, and instead help India’s middle classes. The fact is, companies are not going to use the tax break to invest more in fresh capacity or to hire more people. Many of the beneficiaries are FMCG companies and private sector banks—the Nestles and HDFC Banks of the world—that are already doing well and need no help.
Also, most companies remain over-leveraged because in a very benign inflationary situation, the real levels of debt aren’t coming down, and revenues aren’t going up too much.
So, the accent is on cutting costs. In any case, as the data shows, capacity utilisation is barely 70%. Those companies that want to expand their businesses have bought stressed assets that were up for sale via the corporate insolvency resolution process (CIRP). In fact, the Insolvency and Bankruptcy Code (IBC) mechanism is now well established—after several amendments to the code and the crucial Essar Steel verdict by the Supreme Court—and so, the CIRP should be a lot smoother.
Given the need of the hour is to boost spending, cutting income tax rates would put some money in consumers’ pockets. A well-constructed, simple tax framework without any exemptions and sharply lower tax rates across several income brackets should do the trick. Exemptions complicate matters, help evasion. Right now, rather than encouraging savings, we need to encourage spending; so, every single exemption—Section 80C, Section 80D, exemptions for principal and interest on home loans, etc—should be withdrawn. A simple structure is certain to produce more returns, and multiple income brackets will help minimise leakages. For instance, if all exemptions are withdrawn, including standard deduction, an individual earning Rs 10 lakh per annum should not be paying more than 12%. Tax experts believe lower rates result in better compliance and boost collections.
Governments, past and present, have been unable to recover taxes from professionals like doctors, lawyers, and consultants as also businesspeople, and voluntary disclosure schemes haven’t worked too well. The number of taxpayers in India is ludicrously low compared to various ‘proxy’ metrics such as car sales or foreign travel. The number of individual taxpayers in 2017-18 was 8.45 crore; this includes some persons who paid TDS, but did not file returns. An FE study that compared a survey by ICE 360 degrees and IT returns filed showed there could be some 68,000 individuals in India earning above `5 crore annually, whereas the IT returns data has only 5,000 people making this amount. So, some steps need to be taken to recover taxes from those who are clearly evading taxes; a cleaner structure, with no loopholes, accompanied by some strict regulation and follow-up—no harassment though—should deliver the goods. Bigger disposable incomes that allow people to spend more will help push up corporate revenues, and in turn, the government’s revenues.
The fact is that while the fiscal deficit for the current year 2019-20 might not end up much bigger than projected, thanks to bigger non-tax receipts from telecom dues, the slowdown could see tax receipts remaining under pressure in 2020-21, crimping government expenditure.
Better liquidity in the banking system, greater transmission of repo rate cuts into lower interest rates, and post-election revival in activity were to have lifted growth in H2FY20. Instead, the slowdown has been exacerbated by a combination of slowing credit flows as banks remain unwilling to lend, and less-than-expected transmission as banks stubbornly refuse to compromise on their margins. The post-election spending failed to materialise, with the governments’ finances under severe pressure.
The big blow to growth has come from a sharp deceleration in demand. Low nominal rural wage growth, following from the stress in the farm sector, was hurting demand, but that seems to be steadying; wages grew 4.5% year-on-year (y-o-y) in H1FY20, similar to levels seen in 2018-19. However, due to a variety of factors, urban spends remain muted. In Q2FY20, when GDP crashed to a six year low of 4.5% y-o-y, the private final consumption expenditure, or PFCE, grew at 5.1% y-o-y; that is the slowest in seven quarters but one. In Q1FY20, the PFCE had grown by an anaemic 3.1% y-o-y. At a time when consumer confidence is at decadal lows, consumption needs a big boost. To be sure, consumers are holding back because they are not sure of their jobs, or income levels, or both.