Yesterday, the Modi government made a bold move as the Finance Minister Nirmala Sitharaman announced a major corporate tax rate cut. With this move, the effective rate of taxation (including cess and surcharges) has been brought down to 25.17% from 34.94%. This is being seen as a big gift to the domestic corporates in an effort to ensure a quick economic recovery. Moreover, Nirmala Sitharaman has also announced another major reform by allowing new manufacturing firms to pay taxes at 15% if they set up and start manufacturing by March 31, 2023. Earlier such firms were taxed at 25%. This is a significant move on the part of the Modi government and besides delivering a stimulus to India Inc, it will also attract companies exiting China on account of the ongoing US-China trade war.
Now, it can be safely said that Finance Minister Nirmala Sitharaman has given India Inc a big reason to cheer about. And India Inc did show brimming enthusiasm towards the move. Mahindra and Mahindra’s Managing Director, Anand Mahindra tweeted, “Looks like Diwali has come early.” Deepak Parekh, Chairman – HDFC, told Moneycontrol, “Money available for reinvestment and paying better dividend will be there. You can plough back money and make the company stronger because only 25 percent goes in taxes. It is a great boon.” Bhargav Dasgupta, MD & CEO – ICICI Lombard General Insurance also welcomed the government move and said, “As an economy we needed a large stimulus and we believe that this should be the trigger for the change in the mood that was desperately needed.”
The markets seem to be rejoicing the Modi government’s move with the Sensex witnessing a massive jump of over 1,900 points within hours of the announcement by Nirmala Sitharaman’. It is clear that the Modi government has given the corporates what they wanted, an optimal tax rate. The market sentiment has been fixed to a large extent with this move. And the government has also displayed boldness in its approach towards ensuring a quick recovery of the economy. This massive tax break has cost the government about 1.45 lakh trillion rupees, so its a booster worth what is nearly a per cent of the GDP. Although there will be a revenue shortfall in the short term, better tax compliance higher investments will bridge the gap in the long term, driving India’s growth at a higher pace. The optimal tax rate now makes India an near-unbeatable competitor for investments including foreign investments at a time when India intends to capitalize immensely and aggressively from the US-China trade war. India’s tax rates are now comparable with the lowest in South East Asia. The Modi government is conscious of the impact of tax bonanza on the government’s fiscal arithmetic and the 3.3% target that it has set for itself for the ongoing financial year. However, as per Finance Minister Nirmala Sitharaman the government is betting on “more investments leading to more jobs and economic activity that would shore up revenues.”
India Inc stands invigorated, emboldened and enthused. This move is symbolic of the Government of India’s recognition of the value of its job creators, and it instills a greater sense of responsibility on India Inc to comply by the rules and invest generously. Signs of political opposition to the government’s move have already started coming but the Modi government has shown that it does not care for hollow criticism. Despite revenue and political bottlenecks, the government has gone ahead with the courageous move and now it is for the corporates to respond with enthusiasm in terms of investment and job growth.
The Modi government has played its part by slashing corporate taxes in an unprecedented manner. Now, it is for the corporates to rise to the occasion and make good use of the improved investment climate and an enthused market sentiment. The exchequer has incurred heavy loss in revenues in order to ensure that the corporates will use this opportunity for bringing in more investments and speeding up job growth in the country. Modi government did not try to beat about the bush and took a bold move in a situation where it became absolutely necessary to spur investments and job growth. For quite some time, it was being realised how a tepid economic growth was affecting job growth. A company like the TCS which was once seen as a job creating machine, for example, had witnessed an eighty-five per cent drop in hiring last year. Now, such corporate giants have received a major fillip in the form of tax cuts which should help them in speeding up job creation once again.
The corporate tax break has ensured that the investor climate becomes fair and equitable. It has also done away with the narrative of crony capitalism because the tax rate has made the economic policy more conducive for the corporate world as a whole. The Modi government has taken a big move in the right direction and the taxation level has been brought down to an optimal level. In fact, India has become one of the most tax friendly economies in the region. As we witnessed yesterday, pessimism has largely been replaced by a positive sentiments within the corporate world. It is now for the corporates to ensure better tax compliance and fulfill their obligation of creating more jobs for the Indian youth. Speeding up investments would itself ensure a solid growth in job generation.
