Corporate tax cut down – a boon or bane?

Keeping its image of a reformist government intact, the Modi Sarkar 2.0 took one of the boldest moves to stimulate the gloomy Indian economy. This year Diwali ushered in early for corporate companies as on 20 September 2019, Finance Minister, Nirmala Sitharaman announced corporate tax cutdown.

The taxation laws (Amendment) Ordinance, 2019 slashed corporate tax rate from 30% (effective 34.94% ) to 22% (effective rate 25.17% including surcharges and less) for all domestic companies not availing any tax exemption or incentives. Also, no MAT shall be imposed on companies paying tax under the new regime. Domestic manufacturing companies incorporated on or after Oct 1, 2019 shall be taxed at 15% (effective rate 17.01%) given that no tax exemptions are being availed by such entity and it commences production by 31^st march 2023.  

This is going to be a booster shot for ‘Make in India’ as India will become a hot destination for Global manufacturing companies which otherwise were resilient thanks to uncompetitive corporate tax rates. Following the government’s decision, both the Nifty and the Sensex rose over 5%, which is the biggest one-say rise in a decade.

The enhanced surcharge imposed in the Union budget 2019 on individuals, HUFs shall be waived off on capital gains from sale of equity shares and units of equity oriented Mutual Funds. To cover the lacklustre in Indian financial markets and give PPI’s a sign of relief, the enhanced surcharge for FPI’s on sale of any security shall be slashed.

This tax cut will have many positive impacts on Indian economy. 

A fresh wave of private capex is expected both from India Inc as well as in form of FDI which will generate employment thereby revitalising the whole economy. Tax cut will result in larger corporate savings and it is anticipated that the benefit shall be passed to the customers in terms of lower prices and other attractive offers, shareholders in terms of larger dividends and other stakeholders as well. This decision might ne able to boost the demand cycle.

The waiver of enhanced surcharge on capital gains from FPI’s will result in increased funds from Foreign Portfolio Investor. But on the other side, the tax cut down will result in fiscal slippage as it will widen the fiscal deficit by Rs. 145000 crore or 0.7% of FY20 GDP.

There is another notion floating around that instead of trim in corporate tax, rate cut in income tax would have been better as this would have directly increased the disposable income of consumers thereby increasing the demand.

This reform will cost Modi government huge fiscal loss and has already raised questions on the fiscal discipline of government which otherwise has been very fiscal prudent.

In nut shell, I reckon that this step of Government will encourage the India Inc which is a major contributor in Indian economy. Also, it has clearly stated the agenda of govt. to revive the staggering economy even if it demands major reforms.