In what could be considered the most stunning economic reforms of the last 15 years, the Union government today slashed corporate income tax from 35% to 25%, including all surcharges.
As part of the third wave of economic structural reforms (IBC and GST, previously), this will have a cascading, positive effect across the economy. Given the deep implications of such a move, I touch upon on the headline effects.
Corporate tax rate in line with Asian competitors
It brings India’s corporate tax rate in line with all South East Asian and North Asian countries, removing a key disadvantage that Indian companies faced in competing with these nations.
The announcement by Finance Minister Nirmala Sitharaman also brings India’s taxation in line with the more tax-friendly European and — post-Trump tax cuts — American companies. Lowering the cost of the economy by c. 30% at a single stroke, no ifs and buts like the previous finance minister, has to be applauded without any qualifications.
Corporate tax cut doesn’t benefit corporates alone
The government estimates a tax loss of Rs 1.45 trillion from this move. However, corporate tax collection only increased by approximately 5% in the five months to August, compared with government budget estimates of nearly 18%. So, it would be fair to assume that the actual revenue given up is lower at roughly Rs 1.2 trillion.
This cash will not sit idle; it will get reflected in cash payouts to shareholders, price cuts to consumers and employees not losing their jobs in the stricken manufacturing industry. I fully expect this to counter much of the malaise in the manufacturing industry as supply-led demand recovery happens at a lower price point.
Put the taxman on leash
If this change in attitude to the corporate sector can be coupled with the tax inspectors being pulled back from unnecessary harassment and having undue powers, the “animal spirits” will truly be unleashed in industry, and the next 10-years could resemble the golden growth years of the Atal Bihari Vajpayee era.
Money to come back to India
India is a capital-starved country. It needs foreign capital in excess of $ 20 billion every year to fund the gap. Remedying the unnecessary taxation issue on FIIs in the budget and this tax cut should lead to foreign capital coming back to India in droves — without anything else changing, the multiple of the market has been reduced by approximately 10-12% today. That, in itself, makes India one of the largest, cheapest market in EMs today.
This tax cut should have a multiplier effect on earnings going forward. Given the troubles of China, India as a recipient of foreign capital looks bright again.
No room for complacency, carry on with reforms
There should be no let-up on the clean-up in the banking sector: all the accumulated mess of the last 20 years has to go. We need a clean, transparent, non-crony banking system with the highest level of governance if India is indeed to scale the $ 5.0 trillion peak.
The government oversight of IBC and NCLT has been laudable, not allowing it to sink into the mud as the arbitration laws did. This pressure must be maintained and crooked promoters must pay their debts.