The Indian economy is going through one of the toughest times where a reform measure has failed to get the Indian economy back on GDP growth track. In the last 4 months, there have been a flood of various reforms strategies but the economy is not in the mood of getting into a GDP growth phase of 7%+.
Many professional bodies and organisation have suggested reducing Individual taxation rates. This reduction will help to get consumption demand to grow which will finally get reflected into GDP growth.
Well, we reduced corporate Tax under the expectation that trade war will lead to shifting of investments and business in India making India be a cheap country for production of goods and services. Another thought behind the action was that reduction in corporate tax rates will induce the corporates to invest and hence private sector investments will get into the picture.
This also did not enlighten the GDP growth and more importantly, corporate India focussed more on the reduction of Debt form the savings generated form Tax rate cut-down. Well IBC laws have now turned the game for the Indian economy as corporates are now more careful about leveraged deals.
The most highly recommended which has been given by the various professional bodies and Industry houses are to cut down on Individual corporate tax rate. I am well sorry to say that this will also not push the GDP growth neither much consumption benefit will be coming in front. When an economy is under threat of slowdown then consumers are the 1st who will look for an opportunity to save rather than spend. This is one of the key behavioural patterns of people in an economic slowdown period.
The problem with this type of suggestion is that we are all focussing towards liquidity injection within the system and not towards the other factors which drive the liquidity.
Indian economy is not a manufacturing economy. It is a service-based industry. Hence corporate tax rate reduction will not benefit the economy as service industry GST rate cut down will impact. The services sector is the key driver of India’s economic growth. The sector has contributed 54.17 per cent of India’s Gross Value Added at current price in 2018-19. According to CIA Fackbook sector-wise Indian GDP composition in 2017 are as follows: Agriculture (15.4%), Industry (23%) and Services (61.5%). With the production of agriculture activity of $375.61 billion, India is 2nd larger producer of agriculture product. India accounts for 7.39 per cent of total global agricultural output. India is way behind china which has $991 bn GDP in the agriculture sector. GDP of the Industry sector is $560.97 billion and world rank is 6. In the Services sector, India world rank is 8 and GDP is $1500 billion.
60% of the Indian economy comprises of service-based industry. Now GST rates applicable on the service industry is a matter of concern for the SME and other professionals. GST rates on services comprising of 5%, 12%, 18% and 28% come with various pros and cons for the consumers.
Why the Indian government cannot get a GST rate for service industry uniformed at 10% to 12%. When the service tax regime was ruling Indian economy the service tax rate was floating between 8% to 12%.
If you bring down the GST rates for the service industry then that will give a jump up to the SME and service segment which employs more than half the population of India. The corporate tax cut down will not create demand since Indian corporate is busy in reducing and improving their debt to equity ratio. Hence in these circumstances, the ideal decision should be to cut down GST rates for the service industry which gives a significant boost to the service-related SME.
Now individual tax rate cut down will spook sceptical attitude for the individual who knows that savings are more important than buying a house at this point of time.
The Rs.25000 cr window created by the Indian government for the real estate is not going to get buyers back into the field. Neither the real estate developer will get into the shoes of constructing where his current inventory is piled up and no buyer is there to buy the same. Even after hefty discount buyers are sceptical to buy. Since servicing and asset through loan needs a job and economy security which is not there currently.
Reducing tax slab below 5 lakhs has some sense since this will get the income inequality bridged up for a certain part of the society but giving taxation benefit to the higher end does not make sense.
Well, many of my readers might get angry but one needs to understand that reducing taxes for the rich will not push up GDP growth. The middle-class society needs better benefit for the same where income –inequality gap gets reduced.
Reduction of taxation should resemble with resource allocation for the society. The SMEs are the one who creates the job of the unemployed. If GST rates are reduced for the service industry then the same benefit will pass into the product pricing and also to the society in various forms which creates trade and investments.
Another important finding is that the corporate sector will be slow in terms of investment (excluding the SME). The prime reason being that IBC has compelled every company to think about its core business and manage capital adequacy norms. In simple terms no leveraging of the balance sheet and taking leveraged exposure. We may not witness participation for the private sector on an immediate basis in core sectors. The SMEs are well managed currently and they will take ways for expansion of the business through disruption based technology provided they are given leeway in GST rates which will attract the whole chain of SME.
The recommendation of individual tax slab cut down will not spook confidence to spend within consumer where job security is at stake due to economic slowdown.