Will corporate tax rate cut boost growth and investments?, CFO News, ETCFO

The tax liability of the companies comes down with the government’s move of reducing corporate tax rate to almost 10% on the Friday morning, which enhances the earnings of the firms. Will this lead to higher investments from the companies and boost growth?

“It is a question mark… Why should auto companies invest because there is tax reduction when there is no demand?” asks Madan Sabnavis, Chief Economist of the rating agency, CARE Ratings.

While acknowledging that this is a massive relief to the taxpayers, Sumit Singhania, Partner, Deloitte India feels, “It should take away all reasons for not investing in India, also makes India more competitive tax regime as compared to not only Asia but globally.”

The effective tax including surcharge and cess for domestic companies is 22.17% and for the new manufacturing firms setting up after October 1 but will be completing the production before 2023 will be at 17.01%. This exempts them from paying minimum alternate tax and is applicable for companies not using any exemption or incentives. Though on expiration of the incentive companies can opt for new tax regime.

Read: Corporate tax rates to be slashed to 22%; Govt to revive economy cycle through investments

Demand (in) Economy

This move has been long awaited by the corporates. It comes at a time when slowing economy is grappling with demand slump. Hence, even if the corporates have held back investments because of demand condition, this will not improve the demand.
“If this positive sentiment starts impacting demand growth then that helps businesses,” says Sugata Sircar, CFO and Country Finance Partner at Schneider Electric. Though he feels that tax rates would be positive for investment creation.

Sabnavis opines that this is corporate tax which means individual tax remains the same, which means consumption is not going to go up.

In other interaction with a Partner of the law firm Lakshmikumaran & Sridharan (L&S) S Vasudevan is not convinced with the corporate tax reduction solving this problem. “Corporate tax will ultimately be levied on the profits hence the firms struggling and not being able to earn profits, how will this solve the problem for them?”

He shares that over a period­­ when the enthusiasm will fade only then we will come to know how much it has benefitted. Realistically whether, “it will result in growth, only time will tell.”

Is it good economics?

With the rationalization of taxes and the government losing revenue of about Rs 1.45 lakh cr on account of this corporate tax rate cut, what are the other sources of revenue. While the FM did not answer this question. The follow us that arises was on the alternate source of revenue for the government.

Sircar says, “Manufacturing investment plans (post the rate cut announcement) have seen intact, and we don’t make plan depending on corporate tax per say.”

This money will be at the hand of the shareholder.

While Sabnavis says instead of losing the revenue money if that amount would have been spent on infrastructure – rail and roads it would have directly revived the economy.

“Leaving investment growth on the beneficiary they might not do it. For example: If Income Tax rates are lowered, individual might put it into savings. Similarly, the beneficiary might cut down on its debt,” he explains.

Make in India requires lot of structural changes and corporate tax reduction is not going to solve it. As per him, there are some structural changes like infrastructure, power availability and inefficiencies like red tapism and so on are big hindrances for foreign investors to enter matter even after lower corporate taxpayers.

Vasudev says, “I am not saying there will be no impact but to expect a complete turn-around, not able to see. Make in India requires lot of structural changes and only corporate tax reduction is not going to solve it.”

Even though fiscal deficit and revenue loss seems worrisome for many, Singhania feels that if fiscal deficit of 3% goes up to 4-5% and that means higher growth, and more revenue, so be it. It looks worrisome, but not otherwise. He explains that Internal rate of return (IRR) on every dollar on investment in India the return will progressively increase by 10%.

“If you look at it as a boardroom question if there is same amount of dollar competing for investment in Vietnam, Indonesia, definitely India becomes more competitive and attractive post these rate cuts,” he concludes.

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