Page 308 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 6 External influences on business activity

ACTIVITY 24.4

In a group, investigate what the corporation tax rate of your country is. Analyse how a decrease in the corporation tax rate

can affect the businesses in a particular industry that is dominant in your country.

An increase in corporation tax rate will lead to a smaller profi t after tax for

businesses. Figure 24.6 looks at the impact of this on shareholders and businesses
and how businesses may respond to this.

Business response
Businesses may rethink their
growth strategy. They may
relocate their operations in a
Effect on business foreign country with a lower
A smaller profit after tax for corporation tax rate.
businesses, so a smaller
amount is available to
reinvest and grow. Business response
A smaller profit after tax may
also lead to businesses
Effect on shareholders increasing prices to
Shareholders will receive meet costs.
fewer dividends.

Effect on business Business response
This will discourage existing Businesses may have to look
and new shareholders from at other ways of obtaining
306 investing. funds.

Figure 24.6 The effects of an increase in corporation tax rates
Indirect taxes

Around the world, countries have specific names for the indirect taxes listed below.

They all have the same purpose.
■ value added tax (VAT)
■ import tariff s/customs duty
■ sales tax
EXPLORE! ■ excise duty.
Make a list of the goods and Value added tax (VAT)
services that VAT is applied to in Value added tax (VAT) is added to the prices of some goods and services we buy.
your country. This makes those goods and services expensive and harder for us to buy, so the

Is VAT applied only on non-
government does not put VAT on essential items.
essential items? What is the VAT

rate? Table 24.1 explains the effects of an increase in the VAT rate on consumers and
businesses and how businesses may respond to this.

Policy change Effect on consumers Effect on businesses Business response

Increase in VAT/ ■ Goods and services become ■ Businesses make ■ Less production due to decreased
sales tax. more expensive. fewer sales. demand.
■ Demand for related goods ■ Businesses will have to become
and services falls. more competitive in price.

Table 24.1 The effects of an increase in VAT/sales tax