India's corporate tax falling behind personal tax collections was INEVITABLE!
I’ll probably be a minority and be hated for saying this 🙏🙏
I’ll probably be a minority and be hated for saying this 🙏🙏
But, the growing divergence between corporate and personal income tax collections in India was INEVITABLE.
India did not have an option. And it’s always sad that truth is sidelined when this is discussed.
Let me explain.
(Read only if you are free of political biases)
In 2016, Donald Trump shook up the global market with landmark tax cuts in the US, reducing the corporate tax rate from 35% to 21%.
This humongous drop created a domino effect, leaving countries globally with no options to slash their corporate tax rates to remain competitive in attracting investments.
Many countries followed suit in the next two years, with Hungary going as far as to reduce its rate to just 9% in 2017
Result, Hungary - a country with just 5% of our GDP was suddenly attracting ~20% of our annual FDI inflows!
And India was standing by, with its divergence from the corporate tax rates in other economies rising, one country at a time
And this is why 2017 and 2018 also saw record jumps in outward FDI 📛📛
..
India had actually become an investment backwater.
This is why in 2019, living up to our sad tradition of reacting to situations and not acting proactively, we saw the Govt finally sit up and act.
That’s when the Modi Govt announced a significant cut in corporate tax rates, bringing them down to 22% from 30% for existing companies and to 15% for new manufacturing firms.
Had India not slashed corporate taxes, domestic and international investments would have dwindled even further 🙏🙏
The argument that corporations are now paying less tax than ever before is true, but it's an outcome of strategic necessity rather than mismanagement.
The real issue lies not in reducing corporate taxes but in failing to expand the personal income tax base.
And those are both very different sets of problems.
..
And, mind my words.
In the next 3yrs, India will be forced to cut its corporate tax rates even further.
Because Trump has now announced a reduction in the US corporate tax rate for domestic manufacturers to 15%.
For India, this means another inevitable adjustment to maintain its attractiveness as an investment destination.
..
See, we live in a world where capital moves to where it is treated best 🙏🙏
And, the optics of corporate tax cuts might be bad, but the alternative of not acting would have been far worse — an accelerated outflow of capital, stunted growth, and fewer job opportunities.
Best,
Jayant Mundhra
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