Tax cuts done, now for the revenues

By Taponeel Mukherjee

The Finance Ministers announcement to bring down corporate tax rates in India will surely provide a substantial boost to the economy. Essentially, the tax policy changes will allow for freeing up cash-flows that companies can utilise to make capital allocation decisions ranging from capital expenditure, talent acquisition, or strengthening the balance sheets.

 

A perspicuous 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 slew 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 ripple effect.

Firstly, for cash-strapped corporates, this is an opportunity to get their capital structure in order. In an economy where companies have faced issues with excessive debt, this is an opportunity for the cash to be utilised to pare back debt and repay lenders thereby both improving corporate balance sheets and pumping credit into the system. Secondly, excess liquidity that will be available will allow Indian companies to gradually start competing better on a global level through capital expenditure in areas they deem necessary. Thirdly, cash in hand also makes Indian companies a more attractive destination for both domestic and international capital (which of late has been going out).

Whichever way one looks at the tax changes, the excess money will help whether corporates decide to invest the money, pay back loans, buyback debt, pay shareholders, or boost salaries. Primarily, the cash flow positive nature of the policy changes by the government will provide a significant fillip to economic growth. More importantly, if the policy implementation is done well, then the positive multipliers for the economy will be much beyond this financial year. Structurally, low tax rates can have significant positive multiplier effects in the years to come.

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 fiscal policy, there is now the need to generate the excess cash by the government that will be ploughed back into the economy. In layman terms, how can the government generate more money despite the substantial cut in tax rates that will be effectively used for boosting 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 monetisations must be focused upon to ensure a steady flow of cash that can help finance the revenue foregone.

While asset monetisation from the government saw some action in terms of the NHAI TOT auctions last year, given the moves on the "expenditure" side, this is the time to ensure that the "revenue" generation side picks up in speed, efficiency and clarity. Monetising assets ranging from land banks sitting with government institutions, cash-generating infrastructure assets, and inefficient companies has been debated upon for long. Now is the time to implement a clear roadmap to generating revenues through such monetisation schemes. Because the advantages of such non-tax revenue generation schemes are multi-fold, for one, such schemes will assist in providing revenues that are needed to fund fiscal policy. For the other, markets and investors will have greater confidence seeing a smoothening in the policy frameworks that help cash to flow into productive uses within the economy -- thereby generating greater investor confidence in Indian investments.

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 effective policy framing and implementation on both the "expenditure" and "revenue" side will be the real gamechanger.

(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm. You can contact him at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)