Will India’s Corporate Tax Reduction Move will Revive the Economy?

Finance Minister of India, Nirmala Sitharaman has slashed corporate tax rates to 22% from 30% for domestic companies. The Govt. also proposed a competitive 15% rate for new investments in manufacturing sector.

The move seems to be similar with what the US did last year. It cut corporate tax rate to 21% from 35% effective from January 2018.

Ahead of the Goods and Services Tax Council meeting, Nirmala Sitharaman said, “In order to promote growth and investment, a new provision has been inserted in the Income Tax Act, with effect from financial year 2019-20.”

The decision gives a strong signal that Modi government would take bold steps to revive the economy to bring them on a par with India’s rivals. 

In addition, Nirmala Sitharaman also offered INR 1.45 lakh crore fiscal boost.

Companies, however, will be eligible for the new tax rate only if they forego incentives and exemptions in force. The minister also lowered minimum alternate tax from 18.5 percent to 15 percent for those who continue to avail exemptions and incentives.

These companies will enjoy the lower tax rate options after expiry of tax holidays and the concessions they are availing at present.

Remarks from Indian Prime Minister:

Prime Minister Narendra Modi mentioned the move to cut corporate tax rate as “historic”, further adding that it “will give a great stimulus to Make in India, attract private investment from across the globe…. create more jobs”.

“The announcements in the last few weeks clearly show that our government is leaving no stone unturned to make India a better place to do business, develop opportunities for all sections of society and increase prosperity to make India a $5 trillion economy,” said Modi.

Likewise, Reserve Bank of India Governor, Shaktikanta Das said at a function, “These are definitely very bold and welcome measures.” He further added, “These tax rates take us closer to the tax rates which prevail in this part of the world.”

Previous Efforts by Indian Government:

Over the last few months, the government has announced some measures to increase the growth and revive the economy amid critical job losses and falling demand in leading industries, especially the automotive industry.

Effects:

BSE benchmark Sensex fired up its biggest single day gain in a decade. According to industry measures, the step will awaken the economy which saw six-year growth drop of 5% in April-June quarter.

“It would be credit positive for India, but…” says Moody

Moody’s said the decision to reduce base corporation tax to 22% from 30% would be credit positive for India. However, “it is credit negative for the sovereign, as it aggravates mounting risks for the government in meeting its fiscal deficit target.” 

On the other side, the degree of strengthening in corporate credit profiles will depend on whether the firms reinvest surplus earning into their businesses or utilize them to reduce debt or boost shareholder returns.

According to Moody’s, if the earnings of these companies remain same for fiscal 2019, they will save about $3 billion from the tax rate reduction.

As for now, the major announcement has made quite an entrance. It will be interesting to see the position of Indian economy in coming days.

-Written and Developed by Mayur Shewale

Leave a Reply

Your email address will not be published. Required fields are marked *