Government should not pick 'winners' in industry and should end cross-subsidies to big business
India should cut its tax rate on corporate profits from a statutory rate of almost 33% to 20%, while simultaneously ending all exemptions in a phased manner. Indian corporate tax rates are relatively very high, with the Organisation for Economic Co-operation and Development (OECD) statutory average, including surtaxes and sub-federal rates, being around 25%. Such a cut would help in three ways. First, it would remove government from the business of picking winners and influencing capital allocation, which harms economic efficiency. Second, currently the smaller or less profitable a company, the higher is the effective tax rate paid—and hence a rate cut with exemption removal would actually be “progressive". Thirdly, such a cut will almost be revenue-neutral in a static sense since the average effective corporate tax rate in India is currently 22.85%, whereas in a dynamic sense (even assuming very moderate Laffer curve effects—which shows that tax rates beyond a certain point reduce tax revenue) it would almost certainly yield more revenue as a percentage of GDP (gross domestic product), especially given the reality of profit shifting and transfer pricing. Let us explore all these three arguments in a bit more detail.
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