Revenue from corporate income tax rises in 2020 defying claims to the contrary

Despite the endless attempts to portray that the government was losing money from the income tax cut granted at the beginning of 2020, the government collected significantly more tax income from corporate income taxes in 2020, reinforcing the fact that the lower tax rates generate more income to the government than claimed otherwise. 

According to the data available through August 2020, revenue from corporate income taxes increased significantly by 12.1 percent to Rs.132.1 billion during the eight months, despite the revision of the standard corporate income tax rate to 24 percent, from 28 percent and granting of concessionary tax rates for certain selected industries, effective from January 1, 2020.  In what could be termed as a bold tax revision unveiled in December 2019, the government cut the corporate income tax rate to 18 percent to the manufacturing sector and to 14 percent to the construction sector.  There was a constant denial by certain factions that the government gave away crucial tax revenue by a wasteful tax cut granted no sooner they came into power in November 2019. 

The rating agencies did not welcome the move as they rebuked it by cutting the sovereign credit rating, citing that the tax cuts go against the fiscal consolidation agenda of the government.

Certain other radical left wing parties claimed that the tax cut to businesses results in offering a generous tax benefit to larger corporates, further enriching the wealthy at the expense of the poor and the middle-income class.  None of which is true as the empirical evidence showed, particularly in the West that lower tax rates for both corporates and middle-income class result in wealth creation and income generation in the economy as well as for the government. 

Meanwhile, the revenue from the Pay As You Earn (PAYE) tax on individual income earners fell sharply by 70.8 percent to Rs.9.9 billion in the eight months to August, compared to the same period in 2019, due to the increase of the tax-free allowance from Rs.500,000 to Rs.3.0 million per annum.

While the revenue from personal income tax fell, such moneys left with the individuals are spent on various economic activities as their disposable income goes sharply up, due to lower taxes, including the Value-Added Tax. This creates a virtuous cycle of increased consumption, leading to increased production in the economy, generating more revenues to the government coffers. However, COVID-19-related disruptions did not allow this to happen. 

However, in total, during the eight months to August, the revenue from the income tax fell by 29.7 percent to Rs.167.4 billion over the same period in 2019. Going by the data and the trend, if not for the pandemic, there was a stronger potential for the government to generate either equal or better revenue from the income tax in 2020 than in 2019.