The Finance Ministers announcement to bring down corporate tax rates in India will surely provide a considerable boost to the economy.
Essentially, the tax policy changes will allow for freeing up cash-flows that companies can utilize to make capital allocation decisions ranging from capital expenditure, talent acquisition, or strengthening the balance sheets.
A clear manner of looking at the expenditure-revenue play would be to look at the cash flowing into the economy due to the policy changes.
The taxation policy changes that allow for lower corporate taxes will allow more cash in hand for corporates. It is expected that additional cash in the hands of the companies will allow for a number of opportunities to be tapped into by the corporate sector.
Most importantly, the fiscal boost will benefit the industry supply chains as the excess cash will boost corporates and their suppliers, thereby having a positive effect.
Now with robust tax policy moves to boost the economy through “expenditure”, the government must focus extensively on the “revenue” generation side.
As with all policy changes, especially expansionary policy, there is now the need to generate the excess cash by the government that will work back into the economy.
Therefore, now is the time also to start focusing on effective “revenue” generation to fund the expansionary fiscal policy. The revenue foregone to fund the corporate tax cuts, as stated by the government, is Rs 1,45,000 crore.
More effective revenue generation policies are therefore the need of the hour. Non-tax revenue sources such as asset monetizations must be focused upon to ensure a steady flow of cash that can help finance the revenue foregone.
The issues that corporate balance sheets and the broader Indian economy have faced over the last few years at a core level are cash-flow related, or rather a shortage in liquidity.
Policy moves such as the present cut of tax rates for the corporate world, aimed at freeing up cash-flows on corporate balance sheets, and policies aimed at effectively generating the cash-flows as mentioned above will provide a significant boost to the Indian economy. Going forward, the ability to balance the effectively generating the cash-flows as mentioned above will provide a significant boost to the Indian economy.
Going forward, the ability to balance the effective policy framing and implementation on both the “expenditure” and “revenue” side will be the real game changer.