Direct Taxation in a Liberalized Economy: Challenges and Implications for Corporate Strategy

Abstract

This paper aims at understanding the effects of direct tax reforms on corporate planning in a liberalised economy with specific reference to India. The study looks at the impact of dynamic tax policies including the use of the Goods and Services Tax (GST) and Minimum Alternative Tax (MAT) on the planning and management. Some of the areas covered are managing change such as adapting to policy change, investment and growth decision making, managing risks and broadening corporate tax base. It is found that taxes play a key role in strategic decision-making by changing the level of compliance costs, investment profiles, and profitability. Empirical findings indicate that high corporate tax rates and increased cost of compliance with tax laws reduce profitability but strategic management of taxes can reduce these effects. The two examples of Tata Consultancy Services and Reliance Industries explain how firms respond to tax changes by deploying technology and organizational changes. The results of the study imply that despite the fact that direct tax reforms may raise short-term compliance costs and tax liabilities, they also stimulate corporations to enhance their efficient tax management. The study therefore concludes that there is need for proper tax reforms that will help generate revenues while at the same time not overburdening business with taxes that will affect their profitability; the study also pointed out the need for proper management of taxes as well as anticipation of taxes that are likely to be implemented by the government in future.