Declining share of Corporation Taxes is a long-term trend

1

That India’s fiscal response to the pandemic’s economic disruption has been relatively muted is well known . While there is consensus on the need to increase it, the choice of the fiscal instrument is also an important factor due to two reasons. While any change in expenditure or receipts may affect the deficit ratio, the effect on output would be different due to different multiplier (the multiple by which change in government spending or taxes change overall incomes) values. Also, the income of different classes is affected differently depending on the nature of the instrument chosen.

Capital expenditure (KX) has a relatively strong positive impact on output due to a higher multiplier value. Non-capital primary expenditure (NKPX), such as employment guarantee schemes or food subsidies, directly compensates the income loss of the poorest. Concession in corporate tax may directly and positively affect corporate incomes.

Latest data from the Controller General of Accounts (CGA) can be used to analyse the nature of the post-pandemic fiscal response of the central government. The fiscal deficit to gross domestic product (GDP) ratio up to November 2020 (using the 2020-21 advanced estimate figures) was 0.4 percentage points higher than the value in 2019-20.

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The declining share of corporation taxes in GDP has been a long-term trend in the last decade. Barring a brief uptick in 2017-18 and 2018-19, this number has fallen continuously in this decade. The 2017-18 and 2018-19 rise gave way to a sharp fall in 2019-20, thanks to the corporation tax cuts announced in September 2019. The pandemic seems to have further accentuated this trend. CGA data up to November 2020 puts the corporation tax-gdp ratio at 0.9%, which is much lower than the previous year’s levels. Any attempt to compensate for the income loss of labour in general and bottom deciles in particular requires a drastic break from this trend. What would be needed in particular is a massive increase in non-capital primary expenditures along with capital expenditures.