The fourth bi-monthly monetary policy announcement due Friday is notable for two reasons. First, we will get a half-yearly monetary policy report, with the latest figures on capacity utilization in the economy. It will also, hopefully, have data on India’s imports of capital goods—an important indicator of what is happening to investment. The Directorate General of Commercial Intelligence and Statistics has mysteriously suspended reporting imports by constituents, from which that information was once directly sourced. It does, however, supply it on request to the Monetary Policy Committee, so now we can only get it indirectly from the Reserve Bank of India, twice a year.

Second, this monetary policy is being conducted in what can best be described as a fiscal fog. Official statements from the finance ministry that the flurry of fiscal measures announced over August and September will not breach the fiscal deficit target do not have a plausible ring. Unless it is looking at big receipts from disinvestment, the deficit target would surely be breached, which is acceptable up to a point at a time of slowing growth.

Somewhat bizarrely, though, the 1.45 trillion revenue loss estimate in the notification on the new corporate tax structure looks overstated. It seems to be an aggregate estimate that includes the impact of the rollback of the surcharge on capital gains. The stock market reaction was probably driven more by this rollback than by the corporate tax change.

As for the corporate tax restructuring, it has been widely misreported as a reduction in the tax rate, thus sidelining the move’s unique feature, which is that corporate taxation has for the first time been placed on a two-track option. One track is the new flat rate. The other offers the pre-existing turnover-linked slab rates, with all the accompanying exemptions and incentives continuing as they were. The flat rate option is a first-time innovation, and very commendable as well as welcome. But we have to think about the conditions under which a company would choose the flat rate option, which once exercised can’t be reversed. And why this option was introduced in the first place.

The new corporate tax structure is here to stay, even though issued in great haste through an ordinance. A direct tax bill is to be placed in Parliament, and given the majority the government has, it is expected to be passed into law.

All tax holidays continue to have validity up to their sunset date. But other allowances, principally on account of investment and accelerated depreciation, have no sunset date. Why would a company wishing to invest at a scale that could lower its post-exemption rate to the minimum payable level (minimum alternate tax, or MAT, rate of 15%) opt for a flat rate of 22%?

The answer has to do with the fact that companies find it difficult to get even perfectly valid exemptions past tax officers. These officers, facing revenue targets, often deny permissible exemptions, and even helpfully suggest that the company get the full refund later through an appeal. Because these appeals were usually successful, corporate entities were in effect making short-term loans to the exchequer as window dressing towards the end of each fiscal year.

However, in recent years, refunds seem not to have been forthcoming. Corporate entities have been incensed. What else could explain the recent protests from respected corporate voices like Kiran Mazumdar-Shaw and T.V. Mohandas Pai over the functioning of the tax administration? This element has fed the investment slowdown.

Although higher than the MAT, the new flat rate of 22% offers a bargain to such companies by granting freedom from the hassle involved in pushing claims through.

Corporate taxation all over the world suffers from a complex maze of exemptions and abatements since corporate lobbies are adept at getting modifications worked into the law. The introduction of the MAT was seen as a way of setting a floor to such abatements, and has been adopted in many countries. But even then, the exemptions remain salient in the sense that they have to be worked into tax calculations. With a flat rate, however, they lose salience. It remains to be seen how many companies will opt for the flat rate. There is also an even lower invitational flat rate of 15% for companies commencing production before 31 March 2023. Companies that squeeze in will become a privileged subset of the corporate world. An interesting experiment.

Indira Rajaraman is an economist

Close