India unlikely to go along with US' global minimum corporate tax proposal

India may not be in favour of the proposal by United States Treasury Secretary Janet Yellen’s proposal of a global minimum corporate tax rate, Moneycontrol has learnt from a top government official.

This is partly due to the fact that Finance Minister Nirmala Sitharaman had already cut corporate tax rates for existing and newly incorporated companies to 25 percent and 15 percent in September 2019. Policymakers feel that any further tweak to reflect a tax rate understanding between G-20 countries, at a time of COVID-19 induced economic uncertainty, will not help business sentiment.

The feeling in the government is that Yellen’s statement stems from the United States’ ‘one-shot’ approach to providing stimulus in face of the Covid-19 pandemic, which is opposed to India’s response, which has been more deliberate and has focused on the credit and fiscal side of things.

“We are not in favour of a global minimum corporate tax rate. They (United States) have spent like there is no tomorrow and now want other nations to help pick up the tab,” the official said.

The official said that India’s approach to the pandemic was markedly different from other nations in that it focused on the supply side through its ‘Aatmanirbhar Bharat’ set of announcements, and then only went for a fiscal stimulus in the budget through public spending on infrastructure.

Earlier this week, Yellen called on other countries to join Washington in setting a global minimum corporate tax rate. Yellen is seeking international cooperation, crucial for funding President Joe Biden's ambitious $2 trillion+ infrastructure plan.

"President Biden's proposals announced last week call for bold domestic action, including to raise the US minimum tax rate, and renewed international engagement, recognising that it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion," Yellen said.

The plan seeks to increase the US corporate tax rate to 28 percent from 21 percent. "We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom," she added.

An increase in the tax rate and other measures to prevent the offshoring of profits is expected to fund Biden’s plan.

French Finance Minister Bruno Le Maire welcomed Yellen’s statement and said a global deal on cross-border taxation was within reach. On the same day, April 6, International Monetary Fund’s Chief Economist Gita Gopinath said the Bretton Woods institution has long favored adoption of a global minimum tax on corporate profits.

Gopinath said current disparities in national corporate tax rates had triggered “a large amount” of tax shifting and tax avoidance, reducing the tax base on which governments could collect revenues to fund needed economic and social spending.

It is clear that India will play a crucial role at the G-20 level on any discussions regarding a global minimum corporate tax rate.

Sitharaman announced sweeping corporate tax cuts in November 2019, an unusual decision in itself given that it was announced outside a budget. This was as the Indian economy was showing signs of a slowdown even before the pandemic.

For the fiscal year 2020-21 till February, the centre collected Rs 3.5 lakh crore in net corporate taxes, compared with Rs 4.18 lakh crore in April-February 2019-20. While lower collections can be attributed to the pandemic, officials say some of it is also because of the corporate tax cuts.

Officials say that for most new tax rates, it takes a couple of years for the numbers to stabilize and the expectation is that in 2021-22, the tax cuts will actually lead to higher proceeds as more corporate taxpayers come on board, and due to lower tax evasion.

Incidentally, Sitharaman did attend a virtual meeting of G-20 Finance Ministers on April 7. However, the official statement from the government has no mention of any discussions centred on a global minimum corporate tax rate.