Decision to cut the corporate tax rate beneficial in long-term

After the Finance Ministry has cut the corporate tax rate, there were several reports that about 200 companies might migrate back to India. This can help the Indian economy in the long-term.

Hyderabad (Telangana): The Modi government has brought corporate living rooms to a new life in the times of recession and financial setbacks. The country’s economy hit new lows due to reduced consumer spending and losses across all sectors like Automobiles and FMCG.

In the wake of the impending recession, Finance Minister Nirmala Sitharaman’s decision to cut the corporate tax rate has surprised everyone. This decision is being lauded as the biggest reform in the past 28 years when unemployment is at its highest and GDP is at its lowest. The FM announced that companies without any exemption or incentives would have to pay corporate tax at 22%. For new manufacturing companies, the existing tax has been reduced to 15%. The effective tax rate after surcharges and cess will be 17.01%.

An enhanced surcharge introduced in Budget 2019 will not apply on capital gains arising from the sale of any security including derivatives in hands of Foreign Portfolio Investors. This reform will pave the way towards making India a 5 trillion-dollar economy as the tax concessions will bring in more employment and economic activity.

Arun Jaitley first proposed the idea of cutting down corporate tax to 25% in his first budget session in 2015. He extended the reduced corporate tax rate for companies with turnover of up to Rs 250 crore. The current FM has brought those companies with Rs.400 crore annual turnover under this slab in her budget presentation this July.

She said that 99.3% of industries have come under 25% tax slab and that they would include the rest very soon. The government had budgeted Rs 16.5 lakh crore as tax revenue in the aforementioned fiscal year but breached the target of 3.3% fiscal deficit.

Former RBI governor Duvvuri Subbarao has proposed restricting the fiscal stimulus packages as the government does not have the fiscal space. But it’s a laudable move that the new tax structure, which will lead to the government losing Rs 1.45 lakh crore in revenue annually would revive the economy in the long term. Governments have been levying heavy taxes despite warnings from economists. The current Indian corporate tax is on par with its Asian counterparts which would result in long term development.

Hefty taxes were levied on corporates which establish industries and create employment till a while ago. Organisation for Economic Co-operation and Development (OECD) has revealed that the total tax including surcharges and cess amounted to 48.3%. Corporate tax in European nations is 21.68%, 27.63% in G-7 nations, 21% in USA and 25% in China.

There were several reports that about 200 companies might migrate back to India owing to trade war between USA and China. By cutting down the corporate tax, “Make in India” dream would be fulfilled. Although there is criticism that the economy might take a turn for worse due to fiscal deficit target breach, the Modi government is optimistic that long term benefits will ensue with new businesses and investments. At the same time, the government must reform organizations and streamline processes to ensure higher ease of doing business in India.