Corporation tax rate cut results in loss of revenue for FY21

Subject :Economy

Section: Fiscal Policy

In News: Govt lost Rs 1 lakh crore revenue in FY21 after corporation tax rate cut

Key Points:

A massive cut announced in 2019 effectively resulted in a 10-percentage-point drop in the tax rate.
The corporation tax rate for all existing companies (manufacturing and non-manufacturing) was cut to 22 per cent (without surcharge and cess) from 30 per cent.
Following the cut in corporation tax rate for companies in September 2019, the government faced a revenue loss of Rs 1,00,241 crore in the financial year 2020-21.
Corporation tax collection data shared by Chaudhary, the provisional revenues stood at over Rs 8.28 lakh crore in the financial year 2022-23, higher than over Rs 7.12 lakh crore in 2021-22.

New Tax regime:

Under the new regime introduced in September 2019, a tax rate of 15 per cent was announced under Section 115BAB for newly incorporated domestic companies, which make fresh investment by March 31, 2023, for manufacturing, production, research or distribution of such articles or things manufactured. This was later extended by one year to March 31, 2024.
The corporation tax rate for all existing companies (manufacturing and non-manufacturing) was cut to 22 per cent (without surcharge and cess) from 30 per cent.

Criticism:

The Reserve Bank of India had earlier noted that the new tax regime did not help kick-start the intended investment cycle.
In its Annual Report for 2019-20, it said the tax rate cut may have been “utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the capex cycle”.

Laffer Curve

The Laffer Curve is a graphical representation illustrating the relationship between tax rates and government revenue. It suggests that at low tax rates, increasing taxes leads to higher revenue as economic activity remains incentivized.
However, as tax rates continue to rise, they can eventually discourage productive behavior, resulting in lower economic activity and ultimately decreasing government revenue. The curve implies an optimal tax rate that maximizes revenue, highlighting the balance between generating funds for public services and maintaining a favorable environment for economic growth.
Governments frequently use this relationship as a basis for granting tax cuts both for corporations and individuals.