The first full time woman Finance Minister (FM) will present her maiden budget on 5th of July, 2019. All the people of the country look forward to the FM as a Santa Claus who will bring some goodies for them. Like every segment of tax payers the large corporate houses are looking forward to reduction in the corporate tax from 30% to 25% for them. In this article I am attempting to analyse as to whether she will be able to do it or not.
In order to simplify and rationalise the tax system the successive governments have been phasing out various tax incentives available based on exports or on setting up new units etc. . In order to compensate the tax payer for loss due to withdrawals of these tax incentives the then finance minister in Modi-01 government had promised reduction in the corporate tax from 30% to 25% in his budget speech delivered while presenting the budget for 2016. In the part fulfilment of the promise he had reduced the tax rates for smaller companies having turnover upto 50 Crores in the budget presented for 2017. The same was followed by expanding the scope of companies covered under 25% tax rate from those having turnover 50 Crores to 250 Crores in the 2018 budget. As per the FM’s speech with this expanded base almost 99% of the companies are covered under the 25% tax regime. As per the data given by the finance minister out of 7 lakh companies which file their ITR only 7000 companies are outside the scope of reduced rate thus leaving only 1% companies outside the expanded base.
Since in the two successive budgets presented after his promise to reduce the corporate rates to 25% for all domestic companies, the FM has gradually expended base of the companies and logically this budget may be the year in succession to cover the remaining 1% companies. The moot questions is whether the Finance Minister will do it or rather the FM will be able to do it now? My hunch says the FM may skip them this year with a promise to cover the remaining 1% companies in 25% tax rate regime in later years. Here are my reasons. The total Income Tax paid by the top 100 companies is around Rs. 1.77 trillion against overall collection of Rs. 10.21 trillion constituting around 17% of total income tax collection which is a substantial number.
If the remaining companies are brought under 25% regime, back of th envelop calculation shows that the government will lose around Rs. 0.3 Trillion.
Revenue side constraints
As the popular saying goes “the money does not grow on trees” as famously said by one of our former prime minister, the government has to earn its income to be able to spend. The reduction in the corporate tax rate for the remaining companies is also an expenditure of a sort as this represents income forgone. One of the major reasons which keep the hands of the FM tied is the slowing down of the economy and consistent reduction in the growth of the Gross Domestic Product (GDP). The growth of GDP is not on the same scale as of the year 2016 when the promise of reduction of corporate tax rate was made. The GDP is expected to grow at 6.75% against the growth 7.65% recorded in the first half of 2019. This gives an indication of slowdown in the economy. Moreover there are doubts raised on the GDP numbers as released by the government thus confirming the suspicion that the economy will not grow at the historical rates. With slower growth in the economy the tax collections of government will also bring in lower money, in the form of taxes, at the disposal of the government to peruse its expenditure plans.
Reduced Goods and Service Tax (GST) collection as against the projections is also the reason that the government does not have much leeway. The numbers for the financial year 2018-2019 has shown that gross central GST was at Rs. Rs 4.25 lakh crore which was around Rs 78,000 crore short of targeted figures.
Additional expenditure planned
First of the major health programme “Ayushman Bharat” which was not rolled out in all the states till last year will get expanded this year and thus needing higher allocation for this project. The government has raised the allocation for “Ayushman Bharat” scheme by a whopping 167 percent to Rs 6,400 crore for 2019-2020 in the budget of 2019 against the allocation of Rs. 2,400 crore in 2018-2019.
Likewise The Pradhan Mantri Kishan Sanman Yojana which was initially restricted to the farmers having land less than acres has now been extended to cover all the farmer with a cash payment of Rs. 6000/- to each farmer per year. Earlier this scheme envisaged covering only the small and marginal Indian farmers with less than 2 hectares (4.9 acres) of landholding. The government has also announced many schemes like scholarships of Muslim students which entail cost which has to be funded from the revenue generated in the form of income. These all schemes need money in the hands of the government.
Looking at all the above facts and ground reality, I am of the strong opinion that the FM does not have much elbow room to extend the benefit of 25% corporate tax rate to remaining 1% companies as it it involves sacrificing substantial amount of tax which the government can not afford till the economy recovers.
The author is tax and investment exepert and can be reached at firstname.lastname@example.org and @jainbalwant on twitter.