Corporate Tax Reduction: Reactions, Hits and Misses

The Finance Minister of India, Nirmala Sitharaman announced huge reduction in income tax rate for corporates today. The government cut the basic corporate tax by 8% to 22% from 30% and for new manufacturing companies it is reduced to 15% from 25%. This is another attempt to boost the economy by the government. But it might have a negative impact because the decisions taken today by the government will cost around ₹1.45 lakh crore every year as quoted by the finance minister herself. But, the bottom line is that the ‘Ordinance regarding the tax reduction has already been passed’.

How People Reacted?

Congress leader Jairam Ramesh criticized this decision and said it would do nothing to help the Indian companies. He tweets – “A headline-itis afflicted, panic-stricken Modi Sarkar has cut corporate tax rates less than 3 months after a Budget and 4 months before the next one. This is welcome but it is doubtful whether the investment will revive. This does nothing to dispel fear that pervades in India.”

The tax rates will be applicable from the present fiscal which started in April. Eligible companies can only apply for the lower tax rate after the expiry of all types of concessions and tax holidays from which they are being benefited presently.

However, many experts believe that this reduction in the corporate tax rates will have some really positive economic effects including the encouragement of foreign investment in the country. This investment will grow the capital stock, increase demand for all types of labor and employment. The lowered tax rates will also lead to higher wages, productivity and output. Here are the statements of some renowned capital investment and finance experts –

“The change in tax rates will make a dramatic impact on corporate India, increase invest able funds, reduce cost of capital, improve EPS and valuation, reduce overall costs, improve India’s productivity and competitiveness and lead to a flood of imports! A remarkable ‘Dream Mini Budget’.” Says Mohandas Pai, co-founder of the Aarin Capital, Bengaluru.

Jimeet Modi, the founder and CEO of Samco Securities & Stocknote says –

“The reduction to 22 per cent in corporate taxes will result in massive release of Rs 1.45 lakh crore immediately in the economy, which will boost sentiments and bring in real surplus to the corporates. Companies in consumer finance, banks, and hotels that pay upwards of 32 per cent tax will have maximum benefits. However, rest of the sectors will have a nominal positive impact. This is a path-breaking move delivered by Modi 2.0 government in the interest of economy at the cost of government exchequer in times of crises which will go down well in the history.”

Sadanand Dhume from American Enterprise Institute in Washington DC praises Modi government but also emphasizes that more steps like this should be taken –

“This is a significant move by India to reassure the business community that the Modi government is not hostile to their interests. But by itself it may not be enough to revive the investment climate. The government will need to take other measures – such as Privatizing loss-making state-owned firms, simplifying an overly complex national value added tax, and reforming labour laws – to show that it can pull Asia’s third-largest economy out of the doldrums.”

Outcome

Overall if we look at the current situation, this step can have a positive impact on the economy, but the other side of the story is that it might have some negative effects like it can lead to the increase in the fiscal deficit and disinvestment. The step is costing the government a whooping ₹1.45 Lakh Crore a year which is really a huge amount to let go of the pocket. It will be interesting to see what will the government do to cover-up this loss in the coming days.

Pic Courtesy: GSTStation

Waseem Gauri