India's Tax Puzzle: Why Corporate Tax Cuts Failed to Boost Investment

Introduction: A Paradox in a Growing Economy

As India prepares for Union Budget 2026, the economic landscape presents a curious paradox. While macroeconomic fundamentals appear strong with GDP growth projected around 7%, a critical engine of the economy—private corporate investment—remains stubbornly weak. This sluggishness persists despite a significant corporate tax cut in September 2019, a move intended to unlock capital expenditure and create jobs. Instead, the policy has led to an unintended consequence: a widening gap between corporate and personal income tax collections, shifting the fiscal burden onto households and raising questions about the efficacy of the current tax regime.

The Aftermath of the 2019 Tax Cut

The decision to slash base corporate tax rates to 22% for existing domestic firms and 15% for new manufacturing units was a landmark supply-side reform. The government forewent an estimated ₹1.45 lakh crore in revenue, betting that companies would reinvest their savings into new projects. However, the expected surge in private capex never materialized. According to a 2019-20 RBI annual report, corporations largely used the windfall to deleverage their balance sheets, build cash reserves, and strengthen their financial positions rather than invest in new capacity. This defensive strategy highlighted a fundamental misdiagnosis: the problem wasn't the cost of capital, but a lack of aggregate demand.

A Widening Tax Imbalance

A direct outcome of this policy has been a structural shift in India's tax revenue composition. Before the tax cut, corporate tax was the dominant contributor to the nation's gross tax collections. By FY21, personal income tax collections surpassed corporate contributions for the first time, and the gap has widened since. This trend points to a regressive tax system where the burden is increasingly borne by the salaried class and individuals, whose ability to pay is comparatively lower than that of large corporations. This shift is compounded by what the Chief Economic Advisor has termed “creeping informalisation” and wage growth that has failed to keep pace with inflation, further squeezing household consumption.

The Demand and Export Hurdle

Industry leaders and economists agree that the primary constraint on private investment is insufficient demand. Companies typically begin planning for new capital expenditure only when existing capacity utilization reaches a sweet spot of 80-85%. With domestic consumption under pressure, firms see little incentive to expand. The solution, therefore, lies in a two-pronged approach: stimulating domestic demand and aggressively promoting exports. While sectors like electronics have shown success, many job-intensive industries such as apparel, leather, and diamonds have been hit by global headwinds. A depreciating rupee could offer a competitive edge for exports, but a sustained push is required to fill the capacity gap and trigger a new investment cycle.

Key Corporate Tax Trends

What Industry Expects from Budget 2026

Ahead of the budget, the corporate sector's wish list focuses on creating a stable and predictable tax environment that fosters investment. Key expectations include extending the concessional 15% tax rate for new manufacturing companies beyond its current sunset clause to encourage long-gestation projects. There are also calls to rationalize the Tax Deducted at Source (TDS) regime, particularly for startups and MSMEs, where high rates block crucial working capital. Furthermore, businesses seek clarity on complex issues like the taxation of earn-outs in M&A deals and reforms in loss carry-forward rules to facilitate genuine corporate reorganizations. The overarching theme is a need for policies that provide certainty and reduce litigation.

The Path Forward: A Focus on Demand

The evidence strongly suggests that the 2019 corporate tax cut was a solution for a problem that didn't exist. The core issue holding back private investment is not the tax rate but the lack of demand. The forthcoming budget must therefore pivot its strategy. Instead of relying on broad supply-side incentives, policymakers should focus on measures that put more money in the hands of consumers to revive domestic consumption. Simultaneously, a robust export promotion strategy is essential. Withdrawing the flawed 2019 tax regime and focusing on job creation, demand stimulation, and targeted incentives will be crucial to unlocking India's private investment potential and ensuring a more balanced, inclusive economic growth trajectory.