InvestorQ : If the tax cuts really increases the fiscal deficit, then is it worthwhile for the government to undertake such an exercise? How will the gap be made up?
shrinidhi Rajan made post

If the tax cuts really increases the fiscal deficit, then is it worthwhile for the government to undertake such an exercise? How will the gap be made up?

Answer
image
Riya Dwivedi answered.
2 years ago
Follow

While there will be a cost, there are mitigating factors too. The actual impact on fiscal deficit will not be as large as the 70 bps that the FM has projected. There are a lot of companies that will migrate to 22% over time since they currently enjoy exemptions. Also, the cut in tax rates will bring more corporates under the tax filing bracket and expand the tax base. This will partially compensate for the loss of revenues. Last, but not the least, the 15% tax formula for new investments will trigger a capital investment cycle that will expand output and profits and lead to higher tax revenues. These must be considered.

There is another angle to it and it is called pump priming. What the government has done is to take a counter-cyclical approach to boosting growth. When GDP growth is 5% a proper counter would be to boost growth and tax cuts are the best way to unlock funds. It comes at the cost of a higher fiscal deficit, but is worth the risk. Cut in tax rates get passed on in the form of lower prices and that can also trigger a consumption boom. In short, fiscal deficit may not really be the big concern if it can be compensated by growth.

4 Views