Examine the impact of the corporate tax cut on the consumer prices

The Ministry of Finance has acceded to long pending demand to reduce the corporate tax burden by slashing the rates from 30 per cent to 22 per cent. As the juncture of economic slowdown where the GDP growth has trembled to 5 per cent from 8 per cent a year ago, the move is expected to act as a catalyst to growth and attract investments.

Rehaul of Corporate Taxes

• Corporates with an annual turnover up to Rs 400 crore were required to 25 per cent tax, while those with turnover above that threshold-with paid 30 per cent.
• The effective came to nearly 35 per cent once surcharges and education cesses were factored in.
• As per the new norms, these companies will need to pay only 22 per cent (effectively 25.17 per cent), provided they are not availing of any exemptions.
• Further companies in the manufacturing space registered after October 1 this year need to pay only 15 per cent taxes but will need to start their operations in less than four years, that is, before March 31, 2023. Both these sets of companies need not pay the minimum alternate tax (MAT).

Burden on Exchequer

As per the estimates of Crisil, around 1,000 companies would save nearly Rs 37,000 crore annually from the tax cut.

Will the companies transfer the gain to the customers by reducing prices?

The gains companies will accrue to from rate cuts could be used in three ways:

• Companies could pump the excess cash back into their businesses, adding employees, going in for expansions, building new facilities and so on.
• Companies might choose to reward shareholders with higher dividends
• Companies may pass on the benefits to consumers in the form of discounts on products-be they consumer goods, automobiles or homes.

The third and first options are what the government is hoping for. These measures will lead to customers starting to shop again and the jammed wheels of the economy starting to move again. This sentiment was echoed by Amitabh Kant, CEO of NITI Aayog, wherein he said that “The government has passed on the tax benefits to corporates. Now it’s their responsibility bring back the demand,” said. “Companies have to come back with animal spirits.”

Topics: GS-III: Economic Growth Development