Mumbai : Addressing a long pending demand of India Inc, Finance Minister Nirmala Sitharaman on Friday announced a huge cut in corporate tax rate for domestic companies to boost consumption after GDP tumbled to a six year low.
This is the first meaningful reduction in corporate tax rates, said Credit Suissie in its report ‘The Start of Meaningful Reforms’. The steep reduction is only in headline rates, and not including exemptions. The Rs1.45tn impact does not assume any improvement in compliance, it said.
The report stated that India’s tax rates had become uncompetitive from a global perspective. While many countries had reduced tax rates, India did not and this affected reinvestment ratios, and explains some of the lack of equity capital.
Explaining the impact of this move, the report stated that interest rates are unlikely to go up as real repo rates are still too high, and should fall further.
The borrowing rate for an entity is the sum of inflation, the real repo rate, the term premium and the credit spread: inflation is down, but everything else is at the higher end of past ranges. If these were to normalize, borrowing rates could fall by 2-2.5pp.
According to the report, this move of the government is aimed at boosting the Make in India initiative and at attracting companies and business opportunities shifting away from China. Indian manufacturing exports and FDI had stagnated and needed a booster dose, the report said.