Can a global minimum income tax change an Indian country?


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A few years ago, then-Indian Finance Minister Arun Jaitley announced in the Union budget that the tax rate for companies that do not use exemptions would be only 25 per cent instead of the prevailing rate of 30 per cent.

Significantly, to encourage investment, governments have predicted large tax returns in the past. Thus, although the income tax rate is 30 percent, the effective income tax rate is no more than 22-23 percent. In such a situation, even after the reduction of the tax rate to 25 percent, there was no loss of the state treasury. This step was considered important because in such a situation, India left the list of countries with high taxes. This step was considered progressive.

The next finance minister, Nirmala Sitharaman, announced in her speech on the budget that those old companies, which do not use tax breaks, will have to pay profit tax of only 22 percent and new companies a tax at a rate of 15 percent only. (Note that these tax rates attract 10% of the allowance and 4% of health and education).

Also read: Jeff Bezos supports the Biden income tax increase

Looking at the global perspective, there is a perception in India that the income tax rate here is very high, which is why investors are moving away from India.

In fact, this may be true to some extent, as the tax rate was lower for other competitors in India. Significantly, the corporate income tax rate is 17 percent in Singapore, 25 percent in South Korea, 20 percent in Vietnam, 21 percent in the United States, and although it is 25 percent in China, it is only 15 percent in high-tech industries.

That is, the reduction in the corporate tax rate in India was justified because the corporate tax rate in other countries was much lower than in India.

By reducing this rate India has now become one of the lowest countries in the world with income tax. In fact, the process of reducing corporate tax rates has been going on for some time globally due to competition to attract foreign investors.

In fact, countries like America did not lag behind in this race and then-US President Donald Trump reduced the income tax rate to 21 percent.

The general feeling is that those with a lower income tax will attract more investors. But this step taken by the countries proved counterproductive as almost all major states reduced their corporate tax rates.

It is worth noting that the income tax makes up a major part of the total state revenue. In such a situation, if there is less than the expected increase in investment due to lower income tax, then naturally government revenues will get hit.

Governments today have to spend a lot on social services and infrastructure. The effect of this reduction in the corporate income tax rate is that the company’s profit after tax is significant, but government revenue is also declining significantly.

It is worth noting that in India, income tax accounts for about 25 percent of total central government tax revenue. This means that instead of 25 percent income tax in the past, the rate has now been reduced to 22 percent, which will reduce potential income tax revenue by at least 12 percent.

Significantly, as of today, only a small fraction of government expenditures are available for social services, including education, health, drinking water, women’s development, planned caste, and planned tribal development.

In previous budgets, this was only 9 to 10 percent of total government expenditures. Similarly, a country must also spend heavily on infrastructure for faster growth and human well-being.

Also read: Income tax advance payments increased by 49% in Q3FY2021

But in the absence of resources, the government is unable to spend more money on infrastructure even if it wants to. But if it affects government revenues, then it is incomprehensible how it will increase spending on these items.

Most importantly, neither consumers nor the government benefit from corporate tax cuts; this only increases the profit after taxing the business and increases the wealth of the wealthier business owners.

It can be argued that companies will increase investment if they have more money, but the experience of the last 10 years has shown that today companies are not ready to increase investment, even though they have a lot of cash reserves.

And not only that, according to a recent report, a large number of rich people are leaving the country and transferring their wealth abroad. This is a matter of great concern.

Although then-US President Donald Trump cut income taxes, new President Joe Biden realized his predecessor’s mistake and announced a profit tax increase from 21 to 28 percent.

But in a world where there is competition between countries to competitively cut income taxes due to the rush to invest, the U.S. is also worried that investors could leave the country.

Although US President Joe Biden says raising the income tax will not harm the economy, at the same time his government has also begun international lobbying efforts to halt the trend of competitive income tax cuts that has been going on for years. the last 30 years.

U.S. Revenue Secretary Janet Yellen recently said she was negotiating with a group of G-20 countries to reach an agreement on a minimum income tax internationally.

This U.S. effort should be supported by all member states that rise above short-term considerations as competitive income tax cuts have begun to affect spending on social services and infrastructure, which only harms the general public and the country’s economy.

Significantly, the U.S. president’s attempt to raise income taxes is an important part of his ambitious $ 2 trillion infrastructure plan.

Also read: Direct tax collection increased by 5% to 9.45 lakh cr in RG21: CBDT

The need of the hour is to have a stable tax system so that governments do not lack revenue and that there are no obstacles in providing the necessary social services and infrastructure.

The United States has also made it clear that the government will make arrangements to ensure that companies do not send profits to other countries or countries in “tax havens” after tax increases.

It is necessary to support this effort of the US government to build consensus among the G20 countries on raising the income tax rate and ending the race to reduce the profit tax in the world, so that the world that pandemic can get out quickly its economic problems and development efforts can accelerate in all countries of the world.

In such a situation, if the minimum corporate tax rate is set at 30 percent worldwide, then the infrastructure of all countries will receive a boost and development will be accelerated after a pandemic.

But there should also be a provision for a minimum alternative sales tax (MAT) to discourage the transfer of profits from one place to another and avoid from the countries from which they operate.

For example, Google, social media companies and other technology companies evade taxes in India by not showing profits in the country. The Indian government must suppress this practice by imposing the MAT. If we are trying to create a global consensus on the income tax rate, the international consensus on the MAT is equally important.

(The author is Swadeshi Jagaran Manch, a national interlocutor and a professor at PGDAV College, University of Delhi.)

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