Corporate Tax Cut v/s Cut in Indirect Taxes

The growth of any country rests on four engines - government expenditure, private investment, private consumption and exports.

Private consumption will increase if there is an increase in demand, and demand will increase if people will buy more, and they will buy more only if there is a consistent increase in their income. 

Private investment will increase if there is an increase in growth of the private sector, and there will be growth if there is demand, and there will be demand if there is growth in people's income.

Government/Public expenditure can happen if the public sector earns revenue, and the revenue is added up by direct and indirect tax collection. If people buy more, then they pay more indirect taxes, and if they earn more, they pay more direct/income tax. How much they buy and how much they earn depends on the rise in their income.

Exports depend on global demand. But they also depend on how much we produce here, and that again depends on the economic conditions back home.

Now the thing common in all four engines is demand and rise in income levels. On November 8, 2016, Mr Narendra Modi sucked out 86% of the cash (by value) from the market by demonetising 500 and 1000 rupee notes. With no cash available in the market, there was a direct reduction in demand, and it remains the root cause of the current economic slowdown. To all who were drenched in Modi euphoria in the first few hours of the announcement of demonetization, please follow the pattern above to know how economic slowdown happens.

Now, what?

The Finance Minister has announced a corporate tax cut, and the Prime Minister has as usual termed it historical (what according to him is not?)! The Corporate Sector will see a reduction in expenses, and hence an increase in profit. But will they be able to increase their revenues?

Their revenues will increase only if people buy more, and they will buy more only if they can spend more. And they will spend more only if the government cuts indirect taxes.

Direct tax is income tax, and it is as per the income earned by people. It has a bracket, and hence all do not pay direct taxes. Indirect taxes, on the other hand, are paid by all.

Currently, the elephant in the room is the GST, an indirect tax. If the government cuts this tax, then it will boost spending, which will increase demand and it will lead to growth. Cutting corporate taxes will benefit organisations, and it 'may' revive growth in the long run. But cutting indirect tax will benefit everyone, and most importantly, the common man, and it will immediately resume spending.

But when was this government pro-people? Hence, the root cause of everything we face today is a flawed GST and demonetization as mentioned time and again by Dr Manmohan Singh.

Image Credit: mbarendezvous.com/general-awareness/top-five-challenges-of-indian-economy/