Did corporate tax cut of 2019 lead to tax, GDP boom?

According to IMF’s executive director Surjit S Bhalla, the corporate tax cut of September 2019 – from a base rate of 30% to 22% for existing firms without exemptions/incentives and from 18% to 15% for new manufacturing units – has led to extraordinary gains in the economy.

On August 8, 2022, he wrote in a column that a sharp 30% rise in corporate tax collection during April-June 2022 (Q1 of FY23) was because of this corporate tax cut. Had the pandemic not intervened, he rued, the “efficiency” of “this bold experiment in Modi 2.0” would have been visible sooner.

He further claims that this “one of the largest corporate tax cuts in world history” brought about dramatic changes in the overall economic fortunes of India. Using FY20 as the base, he argued, the corporate tax collections increased by 66%, the average tax buoyancy by 2% (highest since FY07) and the GDP by 33%.

There are several claims in these statements. As for the surge in corporate tax collection, the Finance Ministry had made similar claims earlier, in April this year. In its statement of April 8, 2022, the ministry said: “The gross corporate taxes during 2021-22 was ₹8.6 lakh crore against ₹6.5 lakh crore last year, which shows that the new simplified tax regime with low rates and no exemptions has lived up to its promise.”

However, the ministry had a different take on the overall growth in revenue collections in FY22 though. The same statement said the total revenue collection had jumped by almost ₹5 lakh crore in FY22 (from a budget estimate of ₹22.17 lakh crore to ₹27.07 crore) – a 34% year-on-year growth, led by growth of 49% in direct taxes and 20% in indirect taxes. It attributed such growth to “rapid economic recovery after successive waves of COVID”.

What is apparent in these claims is an obvious attempt to justify the corporate tax cut of ₹1.45 crore in September 2019. This cut came amidst fiscal distress as the very same month Finance Minister Nirmala Sitharaman had told states at Goa’s GST Council meeting that the Centre had no money and hence, wouldn’t be paying the GST Compensation anymore. She followed it up with formal letters in November 2019. For the subsequent two fiscals, FY21 and FY22, the Centre borrowed money from the RBI to pay GST Compensation (₹1.59 lakh crore in FY21 and ₹1.1 lakh crore in FY22).

Straight loss of ₹1.84 lakh cr in first 2 years

Unbeknown to Bhalla and Finance Ministry, the parliamentary Committee on Estimates put out different claims in its report submitted on August 8, 2022.

The panel said the corporate tax cut of 2019 had resulted in a negative “revenue impact” of ₹1.84 lakh crore in FY20 and FY21 alone – ₹87,835.75 crore in FY20 and ₹96,399.74 crore in FY21. It didn’t provide its estimate for FY22, apparently due to a lack of data (more of it later). The panel used the “effective tax rate” in the post-corporate tax cut regime to compute the tax (for those who had opted for the new regime) and then compared it with the tax payable by those very companies under the old regime to calculate the “revenue impact”. It sourced its data from the Directorate of Income Tax System).

Corporate tax and profits

Interestingly, corporate tax is paid on corporate profits (after accounting for all expenses) and that may or may not have anything to do with tax rates. It is by now well known that corporates made historic high net profits (after paying tax) in FY21 and FY22 – amidst the pandemic-induced economic ruins all around. CMIE’s Mahesh Vyas says that 30,000 companies (5,000 listed and 25,000 unlisted) made “a massive 138% increase in net profits” in FY21 over FY20. In FY22, listed companies alone (excluding unlisted ones) made “extraordinary profits” which grew by 66.2% over FY21. When net profits of listed companies started soaring in Q2 of FY21 (July-September 2020), he had described it as “their highest ever profits in the midst of a severe lockdown” – which kept rising in subsequent quarters.

Why did corporates make historic profits amidst the pandemic ruins?

An SBI research paper of July 2021 explains it for FY21. It quantified the impact of various policy measures that helped. It said (i) corporate tax cut “contributed 19% to the top line” (ii) “extended period of low-interest rate” contributed “on an average 5% to the overall top line” (iii) expenditure reduction (through various ways) contributed “as much as 31%” on top line and (iv) “employee costs have been cut” on an average by 3% in FY21.

It is, therefore, clear that the 2019 corporate tax cut contributed to the soaring corporate profits but didn’t raise corporate tax collections. Budget documents show, in FY21 corporate tax collections fell – from ₹5,56,876 crore in FY20 (actual) to ₹4,57,719 crore in FY21 (actual). A dubious history was also made when corporate tax collection in FY21 (₹4,57,719) fell below income tax (₹4,87,144 crore) paid by lesser mortals.

The fall in corporate tax happened in the very fiscal (FY21) in which both listed and unlisted companies recorded 138% net profits (CMIE data). That was also the fiscal when the GDP growth plunged to a historic low of -6.6% – far more than the global average of -3.1%. For IMF’s Bhalla to then claim a 66% rise in tax revenue and 33% rise in GDP, over FY20, because of the corporate tax is not only tenuous but grossly misleading.

This brings a question: How many corporates actually adopted the “new simplified tax regime” (22% tax for existing and 15% tax for new manufacturing units) at the centre of the debate?

According to the budget document for 2022-23, only 15.85% of companies opted for 22% tax without exemptions/incentives and only 0.14 % of companies for 15% tax meant for new manufacturing units in FY20. The Finance Ministry has not updated the numbers. And the parliamentary panel mentioned earlier also quotes these figures.

There is more to the subject of tax cuts to corporates and the rich for that matter. It is a widely prevalent policy which is sought to be justified by the dubious “trickle-down” theory. The theory posits that tax cut for the rich and wealthy benefits the non-rich or that the benefits trickle down. First started by US President Ronald Reagan in the 1980s, it was continued by Donald Trump in 2017. Joe Biden reversed it in March 2022.

The Indian government used the same logic in 2019.

Corporate tax and economy

What did corporates do with the tax cuts in the US in 2017 and India in 2019? There are plenty of lessons to be learnt and hence, need to be recollected. The US Congress studied the impact of Trump’s corporate tax cut in 2017 and found:

1) Corporates used the tax cuts to invest in stock markets and stock buybacks reached a historic high of $1 trillion in 2018. A stock buyback is a tool to manipulate stock prices, benefit a few at the cost of employees and existing shareholders and causes financial fragility by sucking out cash surpluses.

2) Corporate tax collection fell by $40 billion in 2018, which was offset by a $45 billion increase in income tax collections due to the (simultaneous) cut in income tax and payroll tax, which led to an increase in private consumption by 0.4% in the GDP.

3) There was “no indication of a surge in wages” and although investment increased “the growth patterns for different types of assets do not appear to be consistent with the direction and size of the supply-side incentive effects one would expect from the tax changes”.

What saved the US economy was the simultaneous cut in income and payroll tax that led to higher consumption expenditure and higher indirect tax collections. Corporates made no positive contribution to economic growth.

The Parliament never bothered, except for calculating the corporate tax loss in August 2022 (mentioned earlier).

The RBI did. Its 2019-20 annual report said how the tax cut was used: “The corporate tax cut of September 2019 has been utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the CAPEX cycle.” Corporate tax collection fell from ₹5,56,876 crore in FY20 (actual) to ₹4,57,719 crore in FY21 (actual). Unlike the US, India didn’t go for a simultaneous tax cut in income and payroll tax in September 2019.

So, there was no investment or job creation due to the corporate tax cut in India. In fact, analysis of corporate accounts showed, that the “stellar rise” in corporate earnings/profits in FY22 (over 60%) didn’t even lead to a corresponding boom in capital expenditure, rather it grew by a mere 2.3%, a six-year low!

As for job creation, no such claims can be made in any case. Job loss in industries continues. Workers are fleeing industry to informal, low-paying and low-productive agriculture for survival. Apart from other studies, the latest PLFS of 2020-21 confirms it. It shows that agriculture’s share in employment went up from 45.6% (of the total employment) in 2019-20 to 46.5% in 2020-21. Employment in manufacturing went down from 11.2% to 10.9% and the share of industry (including manufacturing) fell from 12.1% to 11.8% during the same period. The services sector, which has a large segment of informal work, also fell from 30.7% to 29.6%.

Did Indian corporates put the money in stock markets?

That is not known in absence of any definitive study. All that is known is that Indian stock markets created multiple historic highs during the pandemic fiscals of FY21 and FY22.

Historic trends of tax cuts

The corporate tax cut is part of neoliberal economics for the past five decades. It has fallen worldwide, from more than 38% in 1990 to about 22% in 2018 – as per a 2019 internal IMF paper. This paper warned against the trend saying that such sharp falls in corporate tax undermined both tax revenue and faith in the fairness of the overall tax system and that it was especially harmful to low-income countries by depriving revenue needed to achieve higher growth and reduce poverty.

There are two recent studies which are relevant in the current context.

One is titled “Do corporate tax cuts boost economic growth?”, in which a German and an Austrian economist examine 441 estimates from 42 primary studies on the impact of corporate taxes on economic growth. What they find is an eyeopener.

They say “there is evidence for publication selectivity in favour of reporting growth-enhancing effects of corporate tax cuts”. That is, there is a pronounced bias toward claiming that corporate tax cut improves economic growth. Such biased studies or claims are conjured up by factors “including researcher choices concerning the measurement of growth and corporate taxes, and controlling for other budgetary components”. They also aver that “correcting for this bias, we cannot reject the hypothesis of a zero effect of corporate taxes on growth”.

Another one looks at it from a broader perspective by taking into account tax cuts for corporates as well as the wealthy. The latter (tax cut for the wealthy) is also a global phenomenon. Trump did it. India did it in 2016 when it abolished the wealth tax.

This study, “The economic consequences of major tax cuts for the rich”, by economists from the King’s College London, identifies all instances of major tax reductions on the rich (including corporates) in 18 OECD countries between 1965 and 2015 and estimates the average effects of these major tax reforms on key macroeconomic aggregate.

Their conclusion: “We find tax cuts for the rich lead to higher income inequality in both the short- and medium-term. In contrast, such reforms do not have any significant effect on economic growth or unemployment. Our results, therefore, provide strong evidence against the influential political-economic idea that tax cuts for the rich ‘trickle down’ to boost the wider economy.”