From UPSC perspective, the following things are important :
Prelims level : Public Estimates Committee
Mains level : Revenue loss to govt
The opposition has questioned the government over the corporate tax cut that led to a revenue loss of ₹1.84 lakh crore to the public exchequer as per a report of the Parliamentary Committee on Estimates.
Why in news?
- The Public Estimates Committee found such a huge revenue loss for the government.
- The middle class was charged at a peak tax rate of 30% against 22% for the corporates. Quiet antithetical!
- The centre on the other hand has repeatedly claimed that the corporate tax cut would help increase tax collection.
What is Corporate Tax?
- Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act.
- While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within India i.e. is being accrued or received in India.
- For the purpose of calculation of taxes under Income tax act, the types of companies can be defined as under:
- Domestic Company is one which is registered under the Companies Act of India and also includes the company registered in the foreign countries having control and management wholly situated in India. A domestic company includes private as well as public companies.
- Foreign Company is one which is not registered under the company’s act of India and has control & management located outside India.
Why has the government slashed Corporate Tax?
- The corporate tax cut is part of a series of steps taken by the government to tackle the slowdown in economic growth since the start of pandemic.
- The most immediate reason behind the tax cut may be the displeasure that various corporate houses have shown against the government’s policies.
- Many investors, for instance, were spooked by the additional taxes on them that were announced by the government during the budget in July and began pulling money out of the country.
- The government hoped that the new, lower tax rates will attract more investments into the country and help revive the domestic manufacturing sector which has seen lackluster growth.
Why Corporate Tax?
- The corporate tax rate is a major determinant of how investors allocate capital across various economies.
- So there is constant pressure on governments across the world to offer the lowest tax rates in order to attract investors.
- Tax cuts, by putting more money in the hands of the private sector, can offer people more incentive to produce and contribute to the economy.
Impact of the rate cut
- The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
- At the same time, if it manages to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue.
- Relief to big companies
- Big companies got a relief of close to 10 percentage points in the effective tax rate including cess and surcharge.
- Enhanced competitiveness
- India was earlier at disadvantage because of a couple of factors and on top of it was the high corporate tax rate.
- After this cut, base corporate tax rate in India has become competitive and should help boost investment.
III. Enhanced EoDB
- Singapore with 17 per cent tax rate, and Vietnam, Thailand, Cambodia and Taiwan with 20 per cent base tax rates are the only countries offering lower rates than India
- India is now much better than China in terms of rate, transparency, and tax administration so companies can now look at India for setting up new units.
Criticisms of the move
- Some see the present tax cut simply as a concession to corporate houses rather than as a structural reform that could boost the wider economy.
- They believe that the current economic slowdown is due to the problem of insufficient demand which cannot be addressed just through tax cuts and instead advocate greater government spending to boost the economy.
- Others, however, argue that lacklustre demand faced by sectors like automobiles is merely a symptom of supply-side shocks such as the GST that have affected various businesses and caused job losses.
- If so, tax cuts and other supply-side reforms can indeed help the economy recover from its slump.
Back2Basics: Public Estimates Committee
- The Committee on Estimates constituted for the first time in 1950, is a Parliamentary Committee consisting of 30 members, elected every year by the Lok Sabha from amongst its Members.
- The Chairperson of the Committee is appointed by the Speaker from amongst its members.
- A Minister cannot be elected as a member of the Committee and if a member after selection to the Committee is appointed a Minister, the member ceases to be a Member of the Committee from the date of such appointment.
Term of Office
- The term of office of the Committee is one year.
- The functions of the Estimates Committee are:
- to report what economies, improvements in organisation, efficiency or administrative reform, consistent with the policy underlying the estimates may be effected;
- to suggest alternative policies in order to bring about efficiency and economy in administration;
- to examine whether the money is well laid out within the limits of the policy implied in the estimates; and
- to suggest the form in which the estimates shall be presented to Parliament.