Government looks to unshackle capital by lowering tax
A day before the finance minister announced the massive cut in corporate tax rates, I had done a long tweet thread on the nationalisation of Indian banks. Meant to cover the entire decade after the famous case of RC Cooper v. Union of India, the thread looked at the price India paid for those decisions. The free market champion RC Cooper, flew down the same day and filed a case in the Supreme Court challenging the nationalisation of 14 private banks. Cooper was a shareholder and director of one of the banks.
In law, that was not good enough to challenge the action by the government, since only the banks themselves could challenge it. The Supreme Court found in favour of Cooper, that he had the standing, as his fundamental rights were indirectly impacted by the Act. On the merits, too, the apex court held that the compensation had to be just and fair and picking 14 banks was a case of hostile discrimination and violated the equality clause of the constitution. The battle was won, the war was soon to be lost.
As can be predicted, the government overturned the ruling with an amended Act, which was passed in Parliament. No one challenged it. Besides it was supported by a constitutional amendment which curtailed compensation and court reviews.
But what was disturbing was not this act of misappropriation, but how, combined with several other actions, this destroyed the Indian economy for at least two decades thereafter. Disturbingly, the other constitutional amendment of that time, the 24th, made fundamental rights subservient to some wooly “directive principles of state policy.”
Parts of this amendment were challenged subsequently, but the power to seize private property by paying a pittance continued. In another two years marginal tax rate was increased to 97.75%, and along with estate duty and wealth tax, the effective tax rate could be in excess of 100%.
This was followed by Indira Gandhi’s proclamation of emergency in June 1975 (Cooper left India for Singapore permanently) and the passing of the 42nd amendment, creating a new anti-constitution of India, that would make Kim Jong Un and his lineal ascendants proud.
The not-last nail in the head of a dynamic India was the deletion of the right to property from a fundamental right to merely a right by the 44th amendment. What followed, predictably was over two decades of rot, authoritarian politics, slothful bureaucracy, corruption and poverty framed in a cuckoo land of license raj.
Predictable because with one shot, nationalisation paralysed three of the four factors of production. Land/property (expropriated or curtailed), capital (expropriated and seized) and entrepreneurship (extinguished and license raj made rajas). The fourth factor was already in steady decline by this time. Labour productivity.
While people are getting excited by the Sensex levels, the finance minister’s announcement is big. Really big, not just because of the outsized tax impact. Yes, this is the lowest corporate tax rate in independent India’s history. Yes, it makes India competitive with almost all countries in the world in tax terms. Today’s move is, instead, significant because it is the antithesis of 1969.
In exactly half a century, the government has decided to unshackle capital and entrepreneurship in one fell swoop. The move will increase profits at companies and thus mean more income for investors; it will allow more space in the medium term to invest in capital expenditure like building more factories; for stressed companies the easing of money all around may act as therapy, create space to reduce corporate debt; where competition is fierce the move may result in lower prices for consumers; and where companies are looking for moving manufacturing outside China (trade wars have beneficiaries too), would have a more hospitable home in India. The beneficial impacts of this would be felt in the short, medium and long terms in more ways than we understand today, even though we will hear breathless commentary against the move by a few on fiscal discipline. But make no mistake, this is not a tax giveaway. It is a massive bet by the government on future tax revenue and growth which it expects to be powered by Indian entrepreneurial spirit and commitment.
(The author is a partner at Finsec Law Advisors and can be found on Twitter at @SandeepParekh)