|20 September, 2019

Bold tax cut hands stimulus charge to India Inc

India announced a cut in the corporate tax rate from 30% to 22% for all companies

Image used for illustrative purpose.

Image used for illustrative purpose.

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MUMBAI (Reuters Breakingviews) - India is trying to make the best of a dramatic economic slowdown. New Delhi has slashed the headline corporate tax rate for all companies from 30% to 22%, and 15% for new manufacturers, an effort to capture some trade war spoils. The move hands some responsibility for boosting confidence to companies. They can pay off debt, invest, reduce prices or pay bonuses. Anything that encourages faltering consumers to spend will spread much-needed economic cheer.

Over the course of recent weeks, Finance Minister Nirmala Sitharaman has announced a series of measures to boost growth, which slowed to a measly 5% in the June quarter. On top of weak private investment, consumption is soft; sales of passenger cars fell a stunning 41% year-on-year in August, one of many industries shedding jobs. Financiers and industrialists note that pessimism has rarely been so pervasive or pronounced. Unlike many other slowing economies, India's pain is mostly homegrown.

Sitharaman has also pushed state-bank mergers as part of the response, but lower levies are a better idea, and timely to boot. Prime Minister Narendra Modi’s government has promised for years to lower the rate, one of the highest in the world after including surcharges and other levies. Although it was reduced to 25% for most companies earlier this year, that policy excluded the largest firms that pay the most in absolute terms. For the government, the adjustment will blow a $20 billion hole in the budget; bond yields surged on the move.

Unfortunately many companies are unlikely to invest the money saved, given still-low capacity utilisation rates. It will help those seeking to pay down debt to avoid the country’s newish bankruptcy courts, but that doesn’t generate growth. Others can use the funds to postpone layoffs, pay out employee bonuses, or offer discounts to customers to boost sales ahead of the country’s long upcoming festive season. The latter will help more people as so many still work in the informal economy. It's now up to India Inc to transform less tax into more stimulus.

CONTEXT NEWS

- India’s Finance Minister Nirmala Sitharaman on Sept. 20 announced a cut in the corporate tax rate from 30% to 22% for all companies.

- Separately, any new manufacturing company incorporated in the country after Oct. 1 will have the option to pay 15%.

- A government panel recommended a cut to 25% for all companies as part of a major overhaul of the decades-old tax code, an official told Reuters in August.

- Earlier in the year, the rate was cut to 25% for companies with sales of up to 4 billion rupees ($56 million).

- India’s benchmark stock index rose around 5% in midday trade on the news.

(Editing by Pete Sweeney and Katrina Hamlin)

© Reuters News 2019

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