Diwali appears to have arrived early for India Inc and the bourses as Finance Minister Nirmala Sitharaman unveiled a big bonanza of stimulus package slashing the corporate tax for domestic companies from 30% to 22% to revive the sagging economy. While the earlier rounds of booster doses, covering recapitalisation of banks, housing and exports sectors, did not evoke much enthusiasm, the latest initiative on taxation reform is certainly a bold move and comes across as a surgical strike on negative sentiments plaguing the economy. The big bang intervention is expected to ease liquidity concerns, besides giving a fillip to the ‘Make India’ campaign, attracting investments from across the world and improving the competitiveness of the private sector. The Finance Minister has finally delivered the right recipe to cheer corporate India because tax cuts will increase the retained earnings of companies and form the investable surplus for future. The bulls are back in the stock market as it witnessed the biggest-ever single-day gains in the last decade and the sheer velocity of the rally signifies the extent of pessimism that was prevailing in the markets. The effective new tax rate for domestic companies, including all additional levies and surcharges, will be 25.17%, while the new manufacturing firms have been offered a lower rate of 17% to boost economic growth rate by incentivising investments to help create jobs. The Centre must now take the next logical step of bringing in reforms in the labour and land laws to unleash the full potential of the economy.
The tax cuts for the corporate houses will mean a loss for the government to the tune of Rs 1.45 lakh crore and a big hole in the revenue collection target. And, this could also push up fiscal deficit. However, a big boost to the investments and consumption demand will more than make up for the loss. A stabilised GST regime in the medium-term will help widen the base for corporate tax as more and more companies come into the indirect tax net and declare their true levels of production. A larger base, coupled with the lower rates, should boost collections. The boom in economic activity that the government expects to generate with the tax cuts should deliver far greater revenues. The existing high corporate tax rate meant that Indian companies were not competitive. The lower tax rate will bring domestic companies on a par with their Asian peers and make them far more competitive, leaving them with more cash for investments and expansion. This will boost the flow of FDIs. Direct tax reforms will also help companies improve their valuations. Now, there is more room for further interest rate cuts to spur economic growth.