By slashing corporate tax rates, by an average of 10 percentage points, finance minister Nirmala Sitharaman has taken Indian corporate tax rates to south-east Asian levels! The move should stimulate investment levels since one of the big hurdles to investment has been higher tax rates in India, apart from issues like labour laws and unfriendly policies in various sectors like telecom and mining.
The FM will lose Rs 145,000 crore on a business-as-usual basis, that is on the assumption that fresh investments don't start immediately; that is a reasonable assumption since investments will take 2-3 years to fructify. While that will raise the deficit, already under stress since the tax targets were too ambitious to begin with, it doesn't really matter; the sensex rose 1500 points within a short while of the announcement.
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The deficit will be higher by this amount, but investors will look at this as a 'good' deficit; a deficit that is being created to fund investment-generation. Also, to the extent that private firms are not investing anyway, the usual 'crowding out' that higher deficits results in will not apply as much.
Another welcome change is that the lower tax rates will be available to those firms that do not avail of exemptions; if a firm is already availing, say, higher depreciation benefits, it will continue to pay the current tax rate, but can move to this whenever it wants. In which case, 22% becomes the highest possible tax rate for companies. And since the complicated exemption regime played a big role in helping tax theft, a flat exemption-less tax regime is the way to go.
The moves are clearly those recommended by the Direct Tax Code panel, so the obvious question is when rates for personal income tax will be slashed. Given that no FM can afford to make such big giveaways, relief for personal income tax will probably take a year or two.
One question remains: Why didn't this happen on July 5 since such cuts would have lifted the mood even earlier. The important thing, though, is that over the past month, the government has responded with great speed to the deepening gloom in the economy.