Union Finance Minister Nirmala Sitharaman announcing a slew of measures last week to revive the investment climate in India, including a cut in corporate taxes, is bound to provide a boost to the economy in the near term. India Inc has hailed the measures as decisive as well as comprehensive.
This is not a booster doze, nor bigger than the budget, but bigger than the last 20 budgets! The string of exuberant and amazingly bold moves by Prime Minister Narendra Modi-led BJP government to slash corporate tax rate for domestic companies to 22% from 30%, and even lower to 15% for new manufacturing companies, that will be incorporated on or after October 1, 2019, is a masterstroke. Our existing tax rate (of about 34%) is relatively high compared to China at 25%, US at 21% and Singapore at 17%.
The total effective tax rate, inclusive of cesses and surcharges, will now be at 25.17% for companies that pay a statutory corporate tax of 22%, while the effective tax rate for new companies that don’t avail of any exemptions, will be around 17.01%, bringing it to the same level as Singapore. With this, the new tax level has made India one of the least taxed countries in the South Asian region and South East Asia. To top it, incentives have been given for new industries.
By slashing the effective tax rate to 17.01%, inclusive of all surcharge and cess for new companies setting up manufacturing operations after October 1, the government has rolled out a red carpet that would ensure that hundreds of billions of dollars of FDI & FII flow over the medium term. With the announcement made before his visit to the US, it gives PM Modi a perfect pitch to attract US investments. The government’s moves are unbridled animal spirits which we cannot compare with anything in the past.
The ongoing China-US trade war has led MNCs to look for an alternative to China as far as their supply chain is concerned. Now, the competitive taxation rate and ongoing efforts towards ease of doing business will help India become a manufacturing destination of choice. India is going to leapfrog like Japan did in the 1960s, when it went from a Third World country to a developed economy. India will certainly be a $5-trillion economy by 2025, and a $10-trillion one by 2033, bringing economic prosperity to the vast majority. The fiscal package has proved that there is no better country for both global and domestic investors to invest, other than India.
I believe the big bang reforms that will revive the sluggish economy, will position India as one of the most attractive business destinations. There is a slowdown all over the globe.
Central banks are cutting rates to the lowest level. Henceforth, whenever Fed reduces rates, more and more global funds will enter India.
The steep cut in the corporate tax rate, releasing Rs 1.45 lakh crore every year, is a big booster dose for the Indian economy. Broadly speaking, top 50 Indian companies that paid a total tax of Rs 1.65 lakh crore for the year ended March 2019, will pay Rs 46,000 crore less in taxes in 2019-20, assuming their profit and revenue levels stay the same. The substantial tax savings will provide more elbow room to companies to cut prices, stimulating consumption, making them globally competitive, boosting export opportunities, increasing demand and igniting the capex cycle — a welcome step to arrest slowdown.
With the revenue loss of Rs 1.45 lakh crore to the exchequer in a year and no plan to cut infrastructure investment, will this stimulus lead to a surge in fiscal deficit to 4% of GDP in 2019-20 from the estimated 3.4%? “Unlikely, the impact will be minor on fiscal deficit. That would be no disaster. The shortfall will be met through increased tax collection due to higher growth, and the continued simplification of GST which will bring more companies on board,” says NITI Aayog vice-chairman Rajiv Kumar.
Rollback of increase in surcharge for foreign investors and domestic investors like individuals, local trusts and HUF on capital gains from the sale of listed shares, will spur capital market investments from Foreign Portfolio Investors and flow of domestic savings to the equity market.
A reduction in the Minimum Alternate Tax (MAT) from 18% to 15%, broadening the scope of corporate spend under CSR norms (2%) by including government, PSU incubators and public-funded education entities, IITs, autonomous bodies engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs, are heartening moves.
With the slowdown in growth having already bottomed out in the June quarter, these bold and pro-active steps will not only kickstart the economy but also function as a rock-solid foundation for sustainable growth.
The optimism is reflected in the blockbuster rally in the equity market on Friday, with the benchmark BSE index shooting up 1921.15 points, or 5.32%, while the Nifty ended at 11,274.20, up 569.40 points, or 5.32% -- the biggest single-day jump in a decade! Investor wealth rose by Rs 7 lakh crore in a single day!
I sincerely thank Finance Minister Sitharaman for releasing the stimulus package which is going to change the narrative for India as an investment hotspot.
(Chief Minister BS Yediyurappa writes exclusively for The New Indian Express on the future of the economy)