Introduction

On a recent announcement by Finance Minister Nirmala Sitharaman, the corporate tax cut has been introduced with the intention of firing the Indian economy in the long term. However, the effectiveness of this measure hinges on various economic factors and its ability to stimulate consumption and production.

Impact on Consumption vs Corporate Reinvestment

The Indian economy currently faces challenges mainly related to consumption, not corporate sizes or investments. A corporate tax cut primarily serves to inject capital into the corporate sphere rather than directly into the hands of consumers. Given that no one is buying their products, corporates may simply hoard the extra cash, hoping for an eventual uptick in demand. This strategy may yield suboptimal results in terms of immediate economic upliftment. In contrast, direct financial relief to the end consumer could more effectively stimulate consumption in the short term.

Liberating the GST and Systematic Taxation

Instead of cutting corporate taxes, a more effective strategy could be to liberate the Goods and Services Tax (GST). Introducing a structured and simplified tax system that ensures systematic collections of taxes and input tax credits (ITC) could enhance the operational efficiency of businesses and reduce their tax burden.

For instance, setting a uniform tax rate of 15% for all indigenous goods, and 28% for all imported goods, would encourage companies to produce more in India, leading to industrial growth and job creation. This approach would potentially prompt companies to focus on production and efficiency, contributing to broader economic growth.

Boosting Manufacturing and GDP Growth

The new emphasis on manufacturing activity from corporates has been evident. For example, Maruthi cars have indicated that savings from tax cuts may be reallocated to reduce the price of vehicles, thus moving inventory and paving the way for increased production. Such activities can lead to GDP growth, aligning with the principles of Keynesian economics, which emphasize fiscal policies during economic downturns.

Indirect Economic Impact and Unfavorable Distribution

The effectiveness of corporate investment alone in stimulating the economy is limited. The Indian economy encompasses several large unorganized and semi-organized sectors such as self-employment, agriculture, and small and medium-scale industries. Helping one sector alone will not kickstart the entire economy. Moreover, corporate investments, while potentially creating growth in production, will only marginally impact consumption patterns unless the resulting products are affordable and accessible.

Unemployment and the lack of purchasing power further hinder economic growth. Corporations often do not reinvest profits into wages, instead focusing on reinvesting in themselves. This perpetuates a hand-to-mouth existence for employees, limiting their ability to increase consumption. Furthermore, corporate social responsibility has been sporadic in the past, with many companies failing to pass on benefits like lower interest rates to consumers.

Conclusion

In summary, while the corporate tax cut may offer some short-term benefits to the corporate sector, it may not significantly contribute to long-term economic growth. A more comprehensive approach, including reforms in the GST system, reducing corruption, and creating systemic tax benefits, could be more effective in achieving economic stability and growth.