Why is Modi Cutting Corporate Taxes but Increasing the GST?

Fiddling with taxes doesn’t lessen your guilt of embezzlement of national treasury. You have to be answerable to Him if not the people who gave you respect and power.

Sri Narendra Modi's government has been making notable changes to the taxation structure in India, impacting both corporate profits and consumer spending. The introduction of the Goods and Services Tax (GST) and subsequent modifications to the corporate tax rate have been at the forefront of these reforms. Despite these changes, there remain debates about the effectiveness and rationale behind these measures.

Overview of GST Reforms

Since the inception of the GST in 2017, there has been an ongoing debate about whether the government is effectively utilizing the new tax regime to benefit the nation. One of the key observations is that there has not been an increase in the GST on any single item since its introduction. In fact, the government has undertaken efforts to reduce the GST on many commodities, indicating a commitment to easing the burden on consumers.

Meanwhile, the decision to cut corporate tax rates was seen as a necessary move to attract new investments in the manufacturing sector from both domestic and foreign companies. This reduction is anticipated to provide a significant boost to the economy by encouraging businesses to reinvest the saved funds into growth and expansion.

Understanding the Complexity of Tax Systems

It is important to differentiate between GST and corporate tax, which are distinct but interrelated elements of the tax structure. GST is a consumption tax levied on the supply of goods and services, collected by the government at each stage of the supply chain. In contrast, corporate tax is assessed based on the net income of companies, capturing profits and earnings at the corporate level.

The primary rationale behind the reduction in corporate tax rates is to enhance the attractiveness of the Indian market for investment. By lowering the tax burden, the government aims to stimulate economic activity, leading to increased productivity and job creation. This strategy is expected to inject more funds into the economy, benefiting businesses and consumers alike.

Effectiveness of GST and Corporate Tax Cuts

While the reduction in corporate tax rates is a strategic move, the impact on overall economic growth remains to be fully realized. Critics argue that the corporate tax cuts may have limited benefits if not accompanied by improvements in governance and regulatory frameworks. Many large corporations may still engage in tax evasion due to the structural loopholes in existing tax laws and governance mechanisms.

In contrast, the implementation of GST has the potential to bring significant benefits to the government by increasing tax compliance and reducing the overall tax burden on consumers. However, for this to truly materialize, there needs to be a concerted effort to address the loopholes and ensure a more robust tax administration system.

Modi's Authority and the Role of the GST Council

Notably, Modi does not have the authority to unilaterally increase or decrease the GST rate. The responsibility for making such decisions lies with the GST Council, a body comprising the finance ministers of states and union territories. This council plays a crucial role in determining the rates of GST, ensuring that the benefits of the tax reform are distributed effectively across different regions and sectors.

Given the complex interplay of factors influencing tax policies, it is clear that there is a need for ongoing dialogue and collaboration between the central and state governments, as well as between various stakeholders in the economy. The success of these tax reforms will depend on effective implementation and continuous monitoring of their impact on economic growth and fiscal health.

In conclusion, while the reduction in corporate tax rates and the ongoing reduction in GST on various commodities are significant steps, their impact on the Indian economy will depend on the broader context of governance, economic reforms, and efficient tax administration.