India gives businesses $ 20.5 billion in tax breaks
On Friday, the Indian government cut corporate taxes, freeing up $ 20.5 billion in business funds to restore private investment and lift the economy from a six-year low that has caused job losses and discontent in rural areas..
Finance Minister Nirmala Sitharaman told reporters that the effective corporate tax rate would be cut to about 25% from 30%, which she said would put it on par with other Asian countries..
Starting from the current financial year, any domestic company has «the ability to pay income tax at a rate of 22%» until they seek any special tax breaks, the minister said, speaking in the western city of Panaji, where officials are also considering lowering sales tax by 20-25 goods..
India gives companies $20.5 bln tax break
According to her, the effective corporate tax rate for companies will be about 25%, including surcharges..
It also announced a reduction in effective corporate tax for Indian firms registered on or after October 1st, to 17%, on condition that they begin production by March 2023..
Sitharaman said foreign firms that have Indian subsidiaries or joint ventures with Indian companies can also receive lower corporate tax rates..
Prime Minister Narendra Modi, forced to deliver on a promise of growth and create tens of thousands of jobs, said the new rates would spur investment, including his campaign to stimulate domestic production..
«The move to cut corporate tax is historic. This will provide a great boost to #MakeInIndia, attract private investment from around the world, increase the competitiveness of our private sector, create more jobs and lead to a win-win situation for 1.30 billion Indians.», – he wrote on Twitter.
The new corporate tax rate for its companies makes India more competitive than neighboring Bangladesh, where the textile industry is growing, but somewhat less attractive than Vietnam, which did business in a trade dispute between the United States and China, according to Deloitte..
Reserve Bank of India Governor Shaktikanta Das said the moves herald «extremely good results» for the economy.
«These are definitely very bold and desirable measures, ”he said. – These tax rates bring us closer to the tax rates that prevail in this part of the world».
Indian equities are up more than 6% and are set to a record in more than a decade after the government announced tax cuts to revive growth in Asia’s third largest economy.
India’s annual economic growth fell to 25-quarter low of 5% between April and June.
Udai Kotak, head of Kotak Mahindra Bank KTMS.NS, tweeted that lowering the corporate tax rate to 25% is «big bang reform. «This shows that our government is committed to economic growth and supports legitimate companies that comply with tax obligations. A bold, progressive step forward», – the banker writes.
Consumer lending companies, banks and hotels that pay tax up to 32% will get the most benefits, says Jimit Modi, founder and CEO of Samco Securities and Stocknote in Mumbai..
While stocks soared, bond yields surged to a nearly three-month high on the assumption that the government may have to borrow more to meet its spending needs for the year, as the measures mean a loss of Rs 1.45 trillion in revenue per year. the current year. The risk of missing the 3.3% budget deficit target increases significantly as tax revenue growth is already weak.
The yield on the 10-year benchmark bond rose to 6.84% from 6.57% prior to the Treasury Secretary’s announcement, while the rupee traded at 70.91 per dollar.
«On the one hand, there is the reality that 1.45 trillion rupees is being sacrificed. On the other hand, there is hope that it will be rebuilt through economic recovery.», – said Mahendra Jaju, Head of Fixed Income Department of Mirae Asset Global Investments in India.
Modi was overwhelmingly re-elected in May, raising hopes for bold reforms to drive growth and stop the loss of tens of thousands of jobs..
Some analysts doubt the new measures will spur consumer activity, which has become a hit.
«I’m not sure how low tax rates will stimulate companies to increase capital investment when the private consumption engine has lost steam.», – said Rupa Ryoge Nitsure, chief economist of L&T Financial Services.
Key industries such as automobiles and construction are currently holding back investment due to falling demand.
«This is a significant step by India to reassure the business community that the Modi government is not hostile to their interests, said Sadanand Dhume, a fellow at the American Enterprise Institute in Washington. – But this alone may not be enough to restore the investment climate».