Stimulate the economy
Put more money in hands of consumer,
Unleash the animal spirits
Cut the personal income tax rates, Cut GST, cut capital gains tax, Cut dividend distribution tax
Increase infrastructure spending
We want the moon, the sun and the sky???
How will we pay for all this-divest, expand tax base, increase tax buoyancy????
The real question is does it really help.
Lets look at some numbers:
|FY||Income Tax Slab||Tax Collection (INR Cr.)||Increase in tax collection (%)||GDP Growth Rate (%)||Direct Tax to GDP Ratio (%)||No. Of Individual+HuF Income Tax Assesses||No. Of Assess growth Rate (%)|
|2001-02||Same as above||32,004||0.76%||8.50||3.03|
|2002-03||Same as above||36,866||15.19%||7.76||3.38|
|2003-04||Same as above||41,386||12.26%||12.06||3.81|
|2004-05||Same as above||49,268||19.05%||17.70||4.1|
|2014-15||250-500K-10%; 500k-1000K-20%; |
|2015-16||250-500K-10%; 500k-1000K-20%; |
|2016-17||250-500K-10%; 500k-1000K-20%; |
|2017-18||250-500K-5%; 500k-1000K-20%; |
|2018-19||250-500K-5%; 500k-1000K-20%; |
Here are some interesting highlights:
- Tax collection grew in sync with economic growth from 2004-05 onwards and continued till global financial crisis on 2008-09
- Tax rate cuts of 2008-09 or 2012-13 or 2013-14 didn’t move the needle on tax collection;
- Tax collection to GDP ratio has remained stable throughout with no appreciable charge this way or that
The most recent and big tax rate cut was in United States in 2017.
All it did was increase deficit while not having any incremental impact on the growth or job creation.
GDP growth was expected to cross 3% consistently, however it’s has averaged barely 2.4%
Job growth has been at the same rate as pre-tax rate cut;
It was contended that individual tax payers will gain USD 4000 PA, however that has not panned out. It was later claimed that hourly wages have increased, however hourly wages are stuck at 3.3% and will have to rise to 7.8% to get an increase of USD 4000.
US corporations spent only 20% of increased revenue gained thanks to tax cut on capital expenditure (as trade war weighted heavily on corporate sentiments); 80% of increased revenues went to share bust-backs and dividends.
Trade war ensured that manufacturing index has remained below 50 and hence under contraction, thereby ensuring that the positive impact of tax cuts didn’t help the sector.
Why then ask for tax cut?
Most of the demands put forward are self-Centered;
Corporates want consumers to spend at any cost that they don’t have to bear.
After having already get a big tax cut, they believe rate should be reduced further, to stimulate them to invest, even though there is no sign that any of them is planning any major capex in near-to-medium term.
Consumers want more money in their hands to boost their financial situation.
All everyone wants is a quick-fix that will push the stock-markets higher and improve sentiments.
Whether there will be a real impact or not-there is no patience to consider.
Economy is Complex
Any economy is a complex organism.
While the basic idea of any intervention is growth or avoidance of recession.
The tools are limited and need to be used judiciously.
While on one hand managing money supply can be a critical tool to stimulate/curb consumption;
Fiscal policy has to work hand-in-hand with monetary to ensure supply and demand is not disrupted in an opposite direction.
In India the government has been the only stakeholder committing and managing capital expenditure to stimulate the economy in the last 6 years.
RBI has also been cutting interest rates in trying to support govt. efforts.
As the above 2 have not helped growth, everyone is clamouring for personal income tax rate cut. Now if income tax rate are also cut, it will only stimulate inflation (in an already inflationary environment) thereby pushing wages and further putting pressure on job creation.
In the event the government wants to cut tax rate then it will also need to cut spending to ensure that inflation doesn’t go out of hand.
It’s not worked in the Past
The tax cuts of 2008-09 combined with duty cuts, export stimulus and higher govt. spending with increasing global commodity prices created unsustainable inflation India going into double digit.
In 2016, most Economist famously called India going through job-less growth.
Clearly anything that the govt. is planning now has to balance various scenarios.
Ronald Reagen’s famous tax cuts of 1982 had to be rolled back partially within 12-months owing to its onerous impact on inflation and job losses.
However the bigger impact came from the investment made in the 70’s and 80’s on education, research and infrastructure that created the right conditions for growth.
On the other hand the austerity of Bill Clinton administration is credited with growth in the 1990’s by keeping the interest rates low.
The govt.’s budget has to keep in mind the larger picture rather than short-term stock market gains.
Various estimates seem to suggest a loss of INR 100,000 crore to govt’s revenue if personal income tax rate cut creating a 20% hole in the already weak tax base.
How will this be made up?
Will increased consumption make up for loss of revenue?
The past doesn’t seem to hold up for this.
There are no easier options for the FM-however staying the course is the need of the hour.