Nirmala Sitharaman, our finance minister has been trying her best to revive our falling economy by bringing about many changes. One such bold move was cutting the corporate tax from an effective 34.94%to an effective 25.17%. However, for new manufacturing firms that are set up after October 1, 2019 and commencing their operations by March 31, 2023, the tax rate is going to fall from 29.1% to 15%. This will boost the corporate income gradually and not immediately. This bold move is going to make India globally competitive, induce domestic and foreign investment and boost the country’s export sectors.
Low tax rates attract investors. By cutting tax rates, India is going to be globally competitive by making the Indian corporate tax comparable to that of East Asia. It is said that the tax cut is going to cause a yearly revenue loss of 1.45lakh crore. However, if the present tax cut is successful in reviving the economy, the tax collection will increase. The increase in tax collection will eventually cover up for the revenue loss.
The present tax cut has a mix response among the citizens. Some say that the tax cut is just a modification to the corporate houses and do not see it as structural reform that will benefit the economy. They believe that the slowdown in the Indian economy is mainly due to the insufficient demand (mainly faced by the automobile sectors) which is caused due to the implementation of goods and services tax which adversely affected various businesses. The cut in corporate tax is not going to help overcome this problem.
There is yet another group of people who say that tax cuts and other supply side reforms will help in the recovery of the economy. According to this set of people, the government should further eliminate other structural reforms that act as entry barriers and make the Indian market more competitive.
According to a report released by ICICI direct research, the tax cut is going play a very positive role in sectors like banks and FMCG. The IT and Pharma sectors are not going to see any change as their effective tax is already much lesser.
This tax cutting will only contribute as a part of the overall economic growth. Other amendments like making labour, land, railway freights and electricity cheaper will lead to India making her way through global competition with her Asian neighbours.