Farewell Address to Final Year Students, DOC, DSE.

  Impractical Speculation of Tax Cut and Historical Surge in Sensex

Shashank Vikram Pratap Singh

Ph.D. Scholar

Department of Commerce

Delhi School of Economics

University of Delhi, India.

ssvikrampratap@gmail.com

The performance of stock market is one of the primary indicators of health of economy. Yesterday,  Sensex hit the all-time high in intra-day trade at 40,392 by rising 340 points. It reflects the investors extremely lofty and overwhelming  sentiments towards India’s growth prospects, although the current state of economy is not as good as it was being reflected in yesterday’s 30-share BSE index. The current state of economy is very distressing and going through cyclical recession. Since last few quarters India’s rate of growth has reached (5%) to 25 quarters low and its core sector output contracted 5.2% in September which is the worst performance in last 14 years. The rate of consumption is showing the downward trend which is reflected from the performance of automobile industry. Compare to Oct. 2017 - June 2018 and Oct. 2018 to June 2019, 17 % fewer cars and 11 % fewer bikes have been sold same as the case with current account deficit (CAD) and export sector. Compare to last fiscal CAD of 1.8%, 2018-19’s CAD widen to 2.1% of GDP and exports remained virtually stagnant and in September it contracted 6.57%. Overall saving rate is somewhere 29% which used to be 38% in 2008 and household saving rate has also declined to 17.2% in 2017-18 from 23.6% in 2011-12. Despite occupying such distressing position, why Sensex hit all time high and reached at 40,392? Why investors are indicating irresistible response towards India’s stock market? Continuous buying by FIIs, US Fed rate cut,  possible trade truce between US and China, better than anticipated corporate results which are quite evident from latest higher retail and car sales during festive month of October and equity related tax cut buzz could be possible reasons for the same. Out of these many possible reasons, the equity related tax cut buzz as reported in media, seems to be the most plausible and the convincing reason for such historical surge in Sensex. On 30^th and 31^st October, the Economic Times published a report that government of India (GOI) is considering to abolish dividend distribution tax (DDT), security transaction tax(STT) and long-term capital gain (LTCG) to woo capital in Indian market. Since then investors are riding on such speculation and pouring thousands of crore rupees in Indian market. Although such decisions have not yet officially announced by Ministry of Finance, GOI. But seeing the current appalling state of economy, GOI is under extreme pressure to bring back the vanished old glory of being the fastest growing major economy in the world. This is quite evident from series of previous transformative economic decisions including reduction in corporate tax rate. But it seems that it’s not enough and investors are expecting from government to take more measures to propel the economy out of its year long slump. Hence, the buzz about obliteration of such taxes (DDT, STT and LTCG) is going on in corporate world. But, seeing the current fiscal arithmetic, is it possible to take such decisions? Let’s explore.

So, if GOI would take such decision, it is going to scorch approximately Rs.80,000 crore in tax revenue which further may disturb the targeted fiscal deficit estimation. Government has already made lots of revenue sacrifices due to various decisions in the last three months. On Friday 20^th Sep. 2019, honourable Finance Minister (FM) Ms. Nirmala Shitaraman made a highly ambitious & impressive announcement and issued the ordinance to amend the Income Tax Act of 1961 and Finance Act of 2019 to reduce much dearly needed corporate tax rate on domestic and new manufacturing units by 10 to 12 percentage points (for more see svpsingh.blogspot.com 20^th Sep. 2019 ).  She announced  key decisions like reduction in corporate tax rate from 30 percent to 22 percent and effective tax rate (including 10 percent surcharge and 4 percent cess) from 30.9-34.61 percent (up to Rs.1Cr. 30.90%; between Rs.1 to10Cr. 33.06%; and exceeding Rs.10Cr. 34.61%) to 25.17 percent. For new manufacturing units set up after 1^st Oct. 2019 and commencing operation by 31^st March 2023, the effective tax rate announced to reduce at 17.01 percent from 29.10 percent earlier. Minimum Alternative Rate (MAT) reduced to 15 percent from 18.50 percent for companies availing the facilities of exemption and incentives. No tax on Buybacks announced before budget i.e. 5^th July 2019. CSR funds made available for incubators, universities and research bodies. Waived surcharge on Foreign Portfolio Investment (FPIs) introduced in the union budget on 5^th July 2019.

The announced corporate tax rate reduction, estimated to cost Rs.1.45 lakh crore a year. In the present circumstance if government made an additional reduction of Rs.80,000 crore, it would present enough evidence to believe that fiscal arithmetic is going to miss the targeted number of 3.3%, keeping in mind the gloomy prospect of GST collection. The recent Union Budget 2019-20 assumes net tax revenue of Rs.16.49 lakh crore which is 25% more than  the previous year's (2018-19) actual revenue of Rs.13.16 lakh crore. GOI has also taken in to the consideration of Rs.90000 crore as dividend from RBI in the current budget. In addition to it, Bimal Janal led committee gave recommendation to transfer Rs.1.76 lakh crore from RBI to GOI. Hence, GOI has Rs.86000 crore (1.76 lakh crore-90000 crore) additional money than estimated in the budget. But still there is hole of Rs.59000 crore (1.45 lakh crore- 86000 crore). And if GOI abolish the equity related tax, the total estimated hole in government’s kitty is going to be Rs. 1.39 lakh crores (80,000 Cr. +59,000 Cr.). But this is one aspect, the other aspect is the arithmetical calculation of  expenditure side and raising taxes on super rich to compensate the loss. The government has an option to slash the welfare spending like PM-KISAN and MGNREGS but seeing the weak demand and rural stress, this option does not seem to be feasible. Raising taxes on super rich is also not feasible because their tax liabilities were already increased (the effective tax rate on those earning over 2 crores is 39% and those earnings above 5 crores is 42.7%)  in the budget this year. Thus, seeing all these prospects and the bleak outlook of targeted GST collection and additional estimated reduction of Rs.1.39 lakh crore from revenue collection, it would not be a premature statement to say that government is for sure going to disturb the targeted fiscal deficit of 3.3 percent of GDP.  Therefore, the buzz about abolition of equity related taxes does not seem to be practically  reasonable as far as fiscal arithmetic is concerned.

It appears from the previous reforms (last three months) and infact the ongoing buzz that government is too much emphasising on Say’s law of market-supply creates its own demand. It has another amazingly powerful and effective option in the form of abolition of income tax of middle-class people which will have instantly humongous political as well as economic dividend. But now seeing the status of fiscal arithmetic and current geopolitical condition, protectionism, trade war between China & US and Trump’s definition of national patriots, it would not be wrong to say that amendments in corporate centric rules, is very smart and deeply thought out strategy for revival and long-term prosperous health of economy. Although for pragmatic and visible outcomes of such policies we have to wait for quite some time.