india

Updated: Sep 22, 2019 04:50 IST

Thirty-six hours. That was all the time the government machinery had to work out the nitty-gritty and implement the ₹1.45 lakh crore of corporate tax rate cuts that Prime Minister Narendra Modi approved, using a special dispensation called Rule 12, on Wednesday afternoon, two people aware of the development said.

Rule 12 empowers the Prime Minister to take a decision and get the cabinet’s ratification of it later, they said, requesting anonymity.

“To meet a situation of extreme urgency or unforeseen contingency in any particular case, Rule 12 of the Government of India (Transaction of Business) Rules, 1961, empowers the Prime Minister to permit or condone a departure from these rules, to the extent deemed necessary,” one of the people said, quoting from the Handbook on Writing Cabinet Notes, prepared by the Cabinet Secretariat.

Finance minister Nirmala Sitharaman on Friday slashed corporate tax rates for domestic manufacturers from 30% to 22%, while for new manufacturing companies, the rate was reduced from 25% to 15% provided they do not claim any exemptions.

The cuts were among the most sweeping ever announced by an Indian government, which would forego ₹1.45 lakh crore in revenue, hailed by corporate entities as historic, and cheered by the markets. They are intended to stoke economic growth that decelerated to 5% in the quarter ended June, the slowest pace in more than six years.

Although the political decision at the top was quick in coming, the background against which it was taken had been prepared well in advance; the proposal was kept under the wraps for weeks within the top echelons of the government, the people cited above said.

The government is conscious of the steep cost of the tax reductions. But it is confident of making it up through more efficient revenue collection as well as by plugging leakages in expenditure, the people said.

They hinted that the fiscal deficit could be readjusted, but it would remain around the budgeted target of 3.3% of the gross domestic product and certainly not near 4%.

“The government is willing to adjust the numbers, but one should not underestimate this government’s capability to undertake efficiency measures on expenditure side. People know how this government used Aadhaar to check any revenue leakages in flagship schemes such as MGNREGA. The government will control wasteful expenditure and enforce compliance to collect revenues,” the person quoted above said.

Revenue secretary Ajay Bhushan Pandey, the top civil servant behind the implementation of the decision, declined to give details of the decision-making process, but focused on the ideas that went into the move.

He said a country of 1.3 billion people cannot afford to ignore manufacturing and rely on imports to meet its needs. “High corporate tax structure in India had dissuaded both foreign and domestic investments. Even Indian investors would have preferred investing in neighbouring and other countries where tax rates would have been competitive,” Pandey said. “And other countries were gaining at the cost of India. This situation could not be allowed to continue. The government had the will to address these issues at the right time.”

Pandey said Friday’s decision was one of the biggest tax reforms ever undertaken by India — one that would not only encourage new investments by domestic as well as foreign investors but also motivate them to reinvest their profits.

It would also lead to ease of compliance and curb corruption. “Corporate tax structure over a period of time got so distorted because of a number of exemptions. Every exemption led to differing interpretations, which led to discretions, litigations, and also corruption. It benefited none – neither the country, nor the people, not even the industry. It only benefited those few unscrupulous ones who could manipulate the system,” he said.

He said corporate tax rates were now so low that no one would have any incentive to manipulate the system. No company would like to risk actions by tax authorities for small gains.

Pandey brushed aside criticism that corporate tax reduction had only addressed supply-side issues and nothing has been done to stimulate demand.

“It is not correct to say that only supply side has been taken care of. If investments [in manufacturing] are encouraged it would generate employment, new jobs will get created, people [workers] will get wages and salaries, they will get money in hands and they will spend. It will boost demand as well as economic growth,” he said.

Pandey said the decision had been carefully weighed so as not to upset existing investors. “That is why an option is given to those who want to enjoy exemptions and continue with the earlier tax regime. After the sunset {period when the exemption is phased out}, even they can join the lower tax rate structure, which is without exemption. Had we withdrawn all exemptions for everyone, many people getting benefits of exemptions would have protested,” he said.

Such a major decision, with ₹1.45 lakh crore of revenue implications, cannot be taken without keeping the big picture in mind, the official said.

“Yesterday, the honourable finance minister said that we would look at and reconcile our numbers. We also know that we cannot cut our expenditures [on welfare, infrastructure and essential schemes] but we can make them efficient. We can also make our tax collection system more efficient,” the revenue secretary said.