Opposition members in the Rajya Sabha on Thursday expressed doubt over the increase in investment by companies after a reduction in corporate taxes during a debate on The Taxation Laws (Amendment) Bill. Initiating the debate on the bill, which was tabled to replace an ordinance that was used to slash corporate tax rates, Congress member Jairam Ramesh alleged that corporate tax reduction announcement on September 20, 2019, was a curtain-raiser to Prime Minister Narendra Modi's Howdy Modi event in Houston.
"The changes were welcomed. But the timing was quite extraordinary. Two days later there was a Howdy Modi in Houston.
Prime Minister always like to go on foreign trip accompanied by major policy announcements and I think what happened on September 20, 2019, was the curtain-raiser for the event to follow the event in Houston," Ramesh said.
"Otherwise after presenting a maiden budget, the Finance Minister would not make such an announcement. Normally, a GST Council is a council where issues are discussed with consensus. This was a unilateral and aggressive announcement."
The bill provides that the headline rate of corporate tax would come down to 22 per cent from 30 per cent and for manufacturing companies who set up shops after October 1, 2019, the corporate tax rate is reduced to 15 per cent.
The government brought an ordinance on September 20, 2019, to give effect to this announcement of corporate tax reduction.
The finance minister had earlier announced that if companies do not make use of any rebate or allowance then the rate of tax would be 25.17 per cent Ramesh asked, "This 25.1 per cent is compared to what. You have a nominal rate of interest and an effective rate of tax. In 2017-18, the effective rate of tax was slightly over 28.5 per cent.
So my question to FM is that 30 per cent to 22 per cent looks very grand but 28.5 per cent to 25.17 per cent effective rate of tax does not look all that grand."
The finance minister had also announced in Goa that the economy will lose Rs 1.45 lakh crore on account of corporate tax reduction. Ramesh said, "Looking at the structure of people who are paying corporate tax, only about 850 odd companies are paying an effective rate of taxation of more than 30 per cent.
These companies account for 16 per cent of total corporate tax collection. So this Rs 1.45 lakh crore will benefit largely 850 odd companies. But it is a very large benefit we are giving, in the hope that capital expenditure will actually increase."
When an ordinance is issued and a bill comes after that, usually the bill sanctifies the ordinance. However, Ramesh pointed out that there are significant differences in the ordinance and the bill.
He said, "One difference it that the effective rate of minimum alternate tax (MAT) was to be implemented from 2019-20 whereas it is 2020-21 in the bill.
Parliament works on the assumption that ordinance is converted into a law. No government should take Parliament for granted."
He also said, "The bill must reflect the ordinance. If changes are made in the bill then it reflects poor staff work and homework on the part of the government in power."
The Rs 1.45 lakh crore revenue loss works out to be about 5 per cent of the total tax collections budgeted.
Ramesh said that the assumption here is that the companies will have more cash which would covert into more capital expenditure and further fuel economic growth.
"The assumption governing this bill that companies will have more cash. Cash will lead to more capital expenditure and that will lead to more growth. It is fundamentally flawed.
The problem is consumption (weak). This announcement would help to balloon markets for 24 to 48 hours but will not be a long-term solution." "There was very famous era of QSQT (Qyamat Se Qyamat Tak movie). We are living in new era of QSQT- quarter se quarter tak."
The GDP growth slowed down for the sixth consecutive quarter from 8 per cent to 4.5 per cent (in July-September 2019). This is a cause for worry. Government has worked very hard to achieve six consecutive quarter decline in GDP growth, he added.
However, Ramesh supported the bill. Sukhendu Sekhar Rao of AITC expressed doubt that if the reduction would have any positive impact on the economy. Citing reports on decline of consumer expenditure, he said that rural spending has slid after four decades.
"If the consumers are not spending due to lower employment... then no company would do additional investment," he said.
A Vijayakumar of AIDMK also supported the amendment, however, he suggested some changes as the removal of October 1, 2019 as deadline for incorporation of new manufacturing firms to avail tax benefits.
Ravi Prakash Verma of SP said that the economy was in "panic stage" and there is a "steering loss" at the critical stage and the government should consult all stakeholders in such situation.
He also said that tax benefits to the corporate would cost around Rs 1.5 lakh crore on the exchequer and added that "the industry would not invest back as per your expectation."
Verma also said that there is "fear factor" in the market and the industrialists would shift their units outside if sincere measures are not taken. GVL Narasimha Rao of the BJP said that it would help the Indian economy and boost the growth rate.
Several companies are looking for new opportunities in the wake of global slowdown and are considering to shift bases from China to another competitive tax economy, he noted. "Now the Indian tax rate is more attractive than other rivals as Taiwan, Indonesia etc," said Rao.
RCP Singh of JDU asked the government to bring the proposed Direct Tax Code as soon as possible, which would bring clarity into the taxation system. Amar Patnaik of BJD also participated in the debate.