New Delhi — Amid the US-China trade war, Finance Minister Nirmala Sitharaman’s announcement on corporate tax is of enormous strategic importance in the long term, said Shamika Ravi, member of the Economic Advisory Council to the Prime Minister of India and senior fellow at Brookings Institution.
“Whether President Donald Trump announces something during PM Modi’s visit (to Houston) or not, you have to look at this from an economic-strategic interest of the country from a long term perspective. If there is an announcement, even better,” she said. “Many firms are trying to relocate out of China given the trade war. This means it is a window of opportunity for India,” she added.
In a major boost to employment and economic activity, the government on Friday slashed corporate tax rate for domestic companies to 25.17 per cent inclusive of all cess and surcharges for domestic companies, a move that was largely welcomed by India Inc as the gloom of an economic downturn looms large.
This historic moves comes two days ahead of the Modi’s visit to Houston where he will address an audience of 50,000 in the company of Congressmen, businessmen and Trump.
Look at Your Neighbours
According to the economist, the reduction in corporate tax is very welcome and long overdue. “This must be considered a major structural reform as far taxation in the Indian economy is concerned. This goes towards making the corporate sector more competitive, not just in manufacturing but overall,” she said.
In terms of the impact this tax cut will have on the manufacturing sector, Ravi said it will get more competitive. “One is likely to see businesses increase with lesser corporate tax. Overall, it is going to lead to an increased flow of investment, not just domestic but also international too.”
However, India is not the only with low corporate tax today. Firms are relocating and moving to competitive markets on account of countries having very high corporate tax. Given this, we also have to make our market “comparatively” more competitive, said the economist.
“While firms want to relocate from China, they want to go to markets that are more agreeable to international capital flows. That’s where you have seen many firms move to Vietnam, Thailand and Indonesia. The FM’s announcement is much more in the realm of ‘ease of doing business’, simplification of the rules: this is the overall guiding principal.”
What Next for India?
RBI Governor Shaktikanta Das on Friday welcomed the Finance Ministry’s decision to slash effective corporate tax to 25.17 per cent. He said the measures taken by the government will “help revive the economy”.
Sitharaman also announced a reduction in the minimum alternate tax (MAT) rate for businesses availing tax breaks to 15% from 18.5%. The government also rolled back an increase in surcharge introduced in the July budget on capital gains made by individuals and other entities from the sale of equity.
Nevertheless, Ravi pointed that while these steps are welcome, “businesses don’t just look at tax rate because many other factors have flow along with it.”
“Regulatory burden in terms of compliances, other clearances are needed. As far as taxation is concerned, we have definitely become attractive and competitive. But we also have to look what is the ease of doing business climate in Vietnam and how do we compare accordingly. That is what is going to drive businesses away from China and towards us,” she said.
For the economist, India’s economic policy is “still a work in progress” and that requires re-calibration in order for these economic measures to boost the economy to work. While the government will continue to push for “the disinvestment agenda, bank consolidation and making it work, getting the liquidity back in the market to optimum levels which is now functioning below optimum level”, Ravi noted that attention also needs to be given to the labour market and judicial reforms.
“What needs a continued thrust is land and labour market, judicial reforms – both long processes, from a very administrative point of view. We need cases cleared and we need them to be cleared at a timely manner. All of this contribute towards the ease of doing business,” she said.