Pros and Cons of Reduction in Corporate Tax

By CA Ajay Chouhan
27-September-2019 3:21:09 PM
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The government cut the basic corporate tax rate to 22% from 30% to bring advantage to companies, while for new manufacturing companies it has been cut down to 15% from 25%. This decision is likely to help FMCG (Fast Moving Consumer Goods) and retail firms take steps to revive demand on the back of lower taxes.

In a big relief for businesses in India, the finance minister, Nirmala Sitharaman on Friday announced a reduction in corporate tax rates, a move that could benefit well for consumer goods companies that have been struggling with a fall in rural and urban demand. Companies can now increase promotions, take price-cuts, and boom their marketing spends to generate demand ahead of the festive season said analysts who research the market.

On Friday, the government cut the basic corporate tax rate to 22% from 30% benefitting the companies, while for new manufacturing firms, it has been cut down to 15% from 25%, finance minister Nirmala Sitharaman announced on Friday, and amid other measures that saw the Sensex drift. The relief measures announced will cost the government up to ₹1.45 lakh crore per year.

Now, this major change in the business economy has some pros and cons. Let’s discuss-

 

Pros Number 1-

A Source of Revenue to Govt. : 

Ultimately, a tax is used to earn revenue for the government. Corporate taxes successfully do this because business corporations and firms are the largest money makers in the economy. This means a steady and strong flow of money in the economy for government revenue. During the recession period (2009), a figure of 30.4 billion was made on corporate taxes of 10 business corporations alone. This conveys that, by targeting those who are making large profits, the government can make gains when companies do. This accelerates the growth of the nation and revenue of the government which may be used towards national debt or public services.

 

Pros Number 2-                                             

For Greater Benefit:

Another purpose is that the advantages seem to outweigh the negatives. The tax is effective in that it takes from large firms and distributes the benefit to everyone. The taxes may take some cash away from businesses however ultimately it’s not harmful. It still permits businesses to perform and grow and does not overly inhibit companies’ ability to make a profit.

 

Con Number 3-          

Equitable                        

This tax is equitable in that everyone pays taxes. firms should not be an exception. Since corporations exist within the country, they have the benefit of the country’s policies and services. If firms were not taxed, they might be obtaining a free ride on services. As a part of society, it’s equitable for companies to pay taxes.

 

Con Number 1-                

The target of Taxes disturbs both, company and consumer

The fact is, though corporate taxes are meant to tax wealthy corporations, the prices actually end up being sent in other places. The teams that end up obtaining the burden of those taxes are none other than the consumer and the worker. Workers are affected in that the prices of the tax either scale back their salaries or hiring. whereas customers are affected in that the company passes on the tax in their product and services by creating them costlier.

 

Con Number 2-                

Attack on Companies:

In addition, thereto, another con of the corporate tax system is that it takes away funds from companies/corporations. This is economically inefficient, as a result of in an economically efficient scenario, nobody can be made happier without making somebody else worse off. Corporate taxes end up creating companies worse off than if they weren’t being taxed.

 

Con Number 3-               

Scares away Business Firms:

Lastly one should think about the economic growth in a country. Companies attempt to choose the simplest place which will facilitate their growth, where they might be the most profitable. By introducing a corporate tax in a certain country, firms might avoid it and search for different alternatives. Some might turn to tax shelters like the Cayman Islands; others simply look for locales that have lesser taxes. Quite simply, a corporate tax can scare off potential and current investors to different countries, resulting in a reduction of economic activity.

 

 

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