Evaluation of recent corporate tax reduction in India using MCDM approach

• Published date: 01 November 2020
• Author: Subhash Manda,Himanshu ,Sumit K. Bansal
• Date: 01 November 2020
• DOI: http://doi.org/10.1002/pa.2270

PRACTITIONER PAPER

Evaluation of recent corporate tax reduction in India using

MCDM approach

Subhash Manda

1

| Himanshu

2

|Sumit K. Bansal

3

1

Department of Financial Studies, Shaheed

Rajguru College of Applied Sciences for

Women, University of Delhi, New Delhi, Delhi,

India

2

Department of Commerce, Government PG

College, Datia, Madhya Pradesh, India

3

Department of Commerce, Delhi College of

Arts and Commerce, University of Delhi, New

Delhi, Delhi, India

Correspondence

Subhash Manda, Department of Financial

Studies, Shaheed Rajguru College of Applied

Sciences for Women, University of Delhi,

New Delhi, Delhi 110096, India.

Email: subhash.manda@rajguru.du.ac.in

The purpose of the study is to evaluate the possible impact of the recent announce-

ment of corporate tax reduction in India using a MCDM approach, that is, AHP

(Analytical Hierarchy Process). For the case study, the experts from different groups

were selected. The possible outcomes of the announcement of corporate tax reduc-

tion were identified from literature and experts. Eight economic outcomes and four

market outcomes of corporate tax reduction were identified. The AHP results show

that the positive possible economic outcomes outweigh the negative outcomes of

corporate tax reduction. Corporate tax reduction will help in enhancing India's com-

petitiveness in the global market and the cost of doing business. The stock returns

may be higher for firms with huge growth potential. However, the government needs

to control increasing fiscal deficit due to loss of tax revenue.

1|INTRODUCTION

The impact of taxation on growth and investment is a hot debate

topic among researchers, politicians and academicians. It is believed

that the reduction in corporate tax has positive bearing on saving and

investment, it boosts economic growth as well. Globally, the govern-

ments have slashed the corporate tax rates. The average corporate

tax rates in Organisation for Economic Co-operation and Develop-

ment (OECD) countries has decreased from 32% in 2000 to 24% in

2018, especially a sharp reduction in USA and UK corporate tax rates

(The Economics Times, 2019). The OECD members such as USA,

France, and Belgium which were historically infamous for highest

corporate tax rate have come up with proposals to reduce corporate

tax rates in order to become more competitive in the global market

(World Economic Forum, 2018).

In line with other countries, the Government of India has also

announced the radical change in corporate tax structure. On

September 20, 2019 the government has decided to bring down the

corporate tax rate from 30% to 22% for existing firms, and from 25%

to 15% corporate tax for new domestic manufacturing firms incorpo-

rated on or after October 1, 2019. This is subject to the condition that

the companies availing the benefit of corporate tax cut will not claim

any tax exemptions. Minimum Alternate Tax (MAT) has also been

reduced from 18.5% to 15% for companies not opting for conces-

sional tax regime and availing tax exemptions (i.e., special economic

zone benefits, R&D incentives or accelerated depreciation). The pri-

mary purpose of the corporate tax reduction is to boost investments

and economic growth. This is a big move to attract not only domestic

but also fresh foreign investments in manufacturing sector and boost

the “Make in India”campaign.

1.1 |Rationale and purpose of the study

Indian economy is facing slowdown since 2019 due to weak private

consumption. The auto and Fast-moving consumer goods (FMCG)

sectors have been slumped into the crisis. Corporate tax reduction is

considered one of the biggest tax reforms for companies in a decade

to combat current slowdown. The reform is expected to boost invest-

ment, raise compliance levels and leave more money in the hands of

companies to invest. It will attract private investment from other

countries, improve competitiveness and help to create more employ-

ment opportunities in country. Now, India has one of the lowest

corporate tax rates in South Asia and ASEAN region followed by Sin-

gapore (17%), Vietnam, Cambodia and Taiwan with 20% base rate

(Mondal, 2019).

A higher corporate tax rate simply means lower private invest-

ment and less economic growth (Freed & Dahlby, 2012). However,

there is a counter argument which suggests that corporate tax reduc-

tion may not help to improve private investment sentiments in the

Received: 27 April 2020Revised: 28 May 2020Accepted: 5 July 2020

DOI: 10.1002/pa.2270

J Public Affairs. 2020;20:e2270.wileyonlinelibrary.com/journal/pa© 2020 John Wiley & Sons Ltd1of7

https://doi.org/10.1002/pa.2270