Can a global minimum corporate tax be a game-changer for India?
Dr. Ashwani Mahajan April 19, 2021
A few years ago, the then Finance Minister of India, Arun Jaitley, announced in the Union Budget that the tax rate on companies that do not avail exemptions will be only 25 per cent instead of the prevailing rate of 30 per cent.
Significantly, to encourage investment, the governments in the past had made provisions for huge tax rebates. So even though the corporate tax rate is 30 per cent, the effective rate of corporate tax is no more than 22-23 per cent. In such a situation, even after reducing the tax rate to 25 per cent, there was no loss to the exchequer. This step was considered important because, in such a situation, India has come out of the list of high-tax countries. This step was considered to be a progressive one.
The next Finance Minister, Nirmala Sitharaman, announced in her budget speech that those old companies, who do not avail tax exemptions will have to pay corporate tax of only 22 per cent and new companies will have to pay tax at the rate of 15 per cent only. (Note that these tax rates attract a 10 per cent surcharge and 4 per cent health and education cess).
Looking at the global perspective, there has been a perception about India that the corporate tax rate is very high here, due to which investors move away from India.
In fact, this may be true to some extent, because the tax rate was lower in other competitors to India. It's notable that the rate of corporate tax is 17 per cent in Singapore, 25 per cent in South Korea, 20 per cent in Vietnam, 21 per cent in the US and although it is 25 per cent in China, it is only 15 per cent in hi-tech industries.
That is, the reduction in the rate of corporate tax in India was justified because the corporate tax in other countries was much lower than in India.
By reducing this rate, India has now become one of the lowest corporate tax countries in the world. In fact, the process of reducing corporate tax rates has been going on globally for some time due to the competition to attract foreign investors.
In fact, countries like America did not lag behind in this race and the then US President Donald Trump reduced the rate of corporate tax to 21 per cent.
The general feeling is that those who have lower corporate tax will attract more investors. But this step taken by the countries turned out to be counter-productive because almost all major nations reduced the rate of corporate tax.
It is worth noting that corporate tax constitutes a major part of the total revenue of the government. In such a situation, if there is less than expected increase in investment due to lower corporate tax, then naturally the government revenues will get a hit.
Governments today have to spend a lot on social services and infrastructure. The effect of this reduction in corporate tax rate is that the corporates' post-tax profits are significant, but the government's income also decreases substantially.
It is worth noting that in India, the corporate tax constitutes about 25 per cent of the total tax revenue of the central government. This means that instead of 25 per cent corporate tax in the past, the rate has now been reduced to 22 per cent, which will reduce the potential income from corporate tax by at least 12 per cent.
Significantly, as of today, only a small part of the government expenditure is available for social services including education, health, drinking water, women development, scheduled caste, and scheduled tribe development.
In the previous budgets, it was only 9 to 10 per cent of the total government expenditure. Similarly, the country also needs to spend heavily on infrastructure for faster growth and people's welfare.
But in the absence of resources, the government is unable to spend more money on infrastructure even if it wants to. But if the government revenues are impacted, then how it will increase spending on these items is beyond comprehension.
The most important thing is that neither consumers nor the government benefit from reducing taxes on corporates; this only increases the profit after tax of the companies and increases the wealth of the wealthier owners of the companies.
It can be argued that companies will increase investment if they have more money, but the experience of the last 10 years has shown that today companies are not ready to increase investment despite having a lot of cash reserves.
Not only this, according to a recent report, a large number of rich people are leaving the country and transferring their wealth abroad. This is a matter of major concern.
Although the then US President Donald Trump reduced the corporate tax, the new President Joe Biden realised his predecessor's mistake and announced an increase in the corporate tax from 21 per cent to 28 per cent.
But in a world where there is competition between countries to reduce corporate tax competitively due to the haste to get investment, the US is also worried that investors may desert the country.
Although US President Joe Biden is saying that increasing the corporate tax will not cause any harm to the economy, at the same time his government has also started international lobbying efforts to halt the trend of competitive reduction in corporate tax that has been going on for the last 30 years.
US Revenue Secretary Janet Yellen recently said she is in talks with a group of G-20 countries to reach an agreement on the minimum corporate tax at the international level.
This effort by the US should be supported by all member countries rising above short-term considerations because the competitive reduction in corporate tax has started affecting the expenditure on social services and infrastructure, which only hurts the general public and the economy of the country.
Significantly, the US President's attempt to increase corporate tax is an important part of his $2 trillion ambitious infrastructure plan.
The need of the hour is to have a stable tax system so that governments do not lack revenue and there is no obstacle in providing necessary social services and infrastructure.
The US has also made it clear that the government will make arrangements that companies do not send their profits to other countries or 'tax haven' nations after tax increases.
There is a need to support this effort by the US government to build a consensus among the G20 countries to increase the corporate tax rate and to end the race to reduce corporate tax in the world so that the pandemic ridden world is able to come out fast of its economic problems and efforts of development can be speeded up in all the countries of the world.
In such a situation, if the minimum rate of corporate tax is set at 30 per cent worldwide, then the infrastructure of all countries will get a boost and development will be accelerated after the pandemic.
But there should also be a provision for a turnover-based minimum alternative tax (MAT) to discourage the transfer of profits from one place to another, and dodge countries from where they run businesses.
For example, Google, social media companies, and other tech companies avoid tax in India by not showing profits in the country. The Indian government needs to curb this practice by imposing MAT. If we are trying to create a global consensus on the corporate tax rate, international consensus on MAT is also equally important.
(The author is the National Co-Convener of Swadeshi Jagaran Manch and Professor, PGDAV College, University of Delhi.)