Blogs

Corporate tax rate cut: will it help to arrest the growth slowdown in India?


  • Current state of the Indian economy
  • Global tax rates vs. Indian tax rate
  • Impact of the corporate tax rate cut

 

A number of global and domestic agencies – Moody’s, Fitch, World Bank, OECD and now RBI and SBI have downgraded India’s GDP growth forecasts for the FY 2019-20. India’s GDP is estimated to reach USD 2.93 trillion in 2019 (USD 11.32 trillion based on purchasing power parity) making it the 7th largest economy in the world. Over the last decade, India stood as one of the fastest growing economies of the world, however, the country is now facing a slowdown whilst GDP growth rate has been continuously declining during the past few quarters due to external and internal factors. During Q1 2019-20, India’s GDP touched a 6-year low at just 5% as compared to 5.8% in the preceding quarter, and 8% in the same quarter last year (Q1 2018-19). Moreover, the second-quarter GDP growth rate is likely to slip further to ~4.2% on account of a continued slowdown in the economy. As per State Bank of India (SBI), flattening of core sector growth, low automobile sales and air traffic movement, deceleration in investment in construction and infrastructure sector is dragging down the GDP growth rate.

The central government has undertaken several measures to grapple the growth slowdown. Some of the latest ones include cut in the corporate tax rate, merger of public sector banks (to contain the issues in the banking sector) and providing incentives to exporters, amongst others. In the current blog, we are majorly focusing on the government’s decision to lower the corporate tax rate and look at the impact it is expected to generate on the broader economy in the medium to long term.

In September 2019, the government announced a sharp cut in corporate tax rate. It has slashed tax rate from 30% to 22% for existing companies and from 25% to 15% for new manufacturing companies. Government has given the option to existing domestic companies to pay the tax at the rate of 22% (effective tax rate comes to 25.17%) without availing any other tax benefits given under the income tax act (such as tax holidays for starts up, exemption to SEZ units etc) while they are also exempt to pay Minimum alternate tax (MAT). If the company wants to avail other tax benefits, they can do so by paying the reduced MAT which is 15% of Book profit instead of 18.5% with applicability of pre-amended tax rates. In addition to that, to boost the investment cycle, the government has also announced tax concessions to new domestic companies that are making fresh investments in manufacturing (and are incorporated on or after 01 October 2019). The government has given them the option to pay the corporate tax @ 15% (effective tax rate comes to 17.01%) without paying MAT and without availing any other tax incentives on a condition that production should commence on or before 31st March 2023.

From an analytical perspective, the real impact of reduction in corporate taxes can be assessed by the ‘tax multiplier for economic activity’. According to a research paper “Fiscal Multiplier for India”, issued in 2013 by researchers (Bose and Bhanumurthy) at the National Institute of Public Finance and Policy, the corporate tax multiplier in India has been estimated at approximately -1. Technically, this depicts the inverse relationship between tax rates and economic growth in the country while suggesting that fall in corporate tax collections by about USD 1 million is likely to enhance the GDP by the same value towards the end of the year. Though there are other variables too like the Capital Expenditure Multiplier (positive impact multiplier ~+ 2.5) or the Other Revenue Expenditure Multiplier (positive impact multiplier ~+.99 ), the implementation of any of these measures is also dependent on the different factors in the economy namely the fiscal situation, investment situation, revenue and expenditure estimates by the government amongst others. The government likely went ahead with the tax multiplier aspect it also provides an immediate benefit to companies, in terms of increased profitability and cash availability, other than long term anticipated benefits on fresh capital investment and incremental governmental spending.

Furthermore, most countries have historically considered tax rate cut as one of the measures to boost investment in the country alongside an increase in GDP. For example, in 2017, United State introduced “Tax Cut and Jobs Act 2017” applicable from fiscal year 2018 to reduce the corporate tax rates from 35% to 21% amongst other reforms. Tax Foundation, USA has estimated that this will boost the country’s GPD to 2.9% by 2027, up from 2.3% in 2017. Moreover, the average corporate income tax of OECD member countries has reduced to 23.9% in 2018, from 32.5% in year 2000 to strengthen their economies. Tagged as a developing country, India might not be comparable with developed US or UK economy, however, the country could expect positive impact on its economy due to tax cut. As per HDFC bank, a 10% reduction in corporate tax rate can result in 0.20-0.50 basis points increase in India’s GDP growth. HSBC also expects a 20-basis point boost to Indian GDP growth due to this reform in the next fiscal year. After reduction in tax, India’s position will become competitive with Asian peers while this also helping the country in attracting investors looking to move out of China. Foreign Direct Inflow (FDI) has averaged USD 61 billion during the past 3 years in the country wherein tax rate cut is expected to further aid in attracting more FDI in the future.

This tax cut might also expand the corporate companies base in India as new manufacturing companies will now be taxed at an even lower rate of 15%. Moreover, lower tax outflow could also increase the share of profit-making companies in India while net profit margins for these companies could cross 10% in the near term. 

Amidst the ongoing US-China trade war, many companies are looking to shift out of China. Credit Suisse has estimated that about 100 companies with global revenue of approx. USD 1 trillion may shift out of China and countries like India, Taiwan, Vietnam, and Malaysia would be most benefited. In such a scenario, the reduced corporate tax rate coupled with ease of doing business could likely show positive results for the country. According to the UN Trade and Investment body, India has gained approx. USD 755 million in first half of CY 2019 from additional exports, mainly in chemicals, metals, and ore. About 200 US companies have shown their interest in moving to India from China as per the US-India Strategic Partnership Forum (USISPF).

Nevertheless, the lower tax collections could affect the government’s fiscal deficit budget target. As a result of tax cut, the Government of India pegged a revenue loss of Rs. 1.45 lakh crore (USD 20.45 billion). How the government will fill the gap of lost revenue due to tax cut is a concern. While, this gap could be narrowed down somewhat by disinvestments of shares in government undertakings and the recent transfer of central bank’s surplus reserve, it would still taper fiscal room for manoeuvre. While factors including financial stress especially in rural area, weak consumer demand and corporate sentiment remain headwinds for Indian economy, Televisory expects that lower tax rate will result in an in increase in revenue at corporate level along with fresh investments in the country and  new job creation, which will further increase tax collection and support the economy in moving forward towards positivity over the medium to long term.

Your Rating

Slack set out to kill E-mail

Started as a side project for internal use in a gaming company High revenue growth with recurring revenues Went Public by offering shares through the Direct Public Offering ...

Will the Big Bang merger drive, of Indian Public Sector banks, provide the required impetus to the slowing economy?

India’s Government announces plans to merge 10 of the country’s public sector banks Probable impact of the mergers   India’s Finance Minister, Nirmala Sitharaman,...

Is Mothercare on the verge of collapse?

History of Mothercare What went wrong? Company moved into administration   Mothercare, an iconic brand for babies, children and parents to be, went into...

Rapidly growing Indian online food delivery industry and its unrealised profits

Evolution of online food delivery industry in India Geographical penetration and scope for expansion Key players and their zeal to balance revenue and costs   Online...

Tire manufacturing industry, analysing the cost and margin trends

The global market for tire manufacturing stands at $180 billion. Michelin anticipates the long-term demand to rise at the rate of 5 to 10% a year in developing markets and 1 to 2% a year in mature...

An analysis of Malaysian rubber glove industry

How big is the international rubber gloves market? Reasons behind the healthy and steady growth Malaysia’s role in the industry Why are companies struggling for stable...

Failure of Amazon in China, an analysis

E-commerce market in China Online consumer product retailers in China Performance of Amazon in China   Amazon is a global e-commerce player selling a wide...

Can lithium-ion anode demand for needle coke reduce availability for electrode players?

What is needle coke? Uses of needle coke Lithium-ion battery manufacturers demand needle coke   Needle coke? Needle coke is a specialised form of petroleum coke...

Is the radio broadcasting industry in the U.S. dying? An analysis

Radio, the most powerful medium of reach in the U.S. Why the industry is moving at a slow pace? Radio’s health is still sound, will it continue in the long-term?   ...

Carbon black industry, strong potential for supernormal profitability?

What is carbon black? Its uses Impact of the environmental curbs in China   What is carbon black? Carbon black is a fine carbon powder and it is a disorderly...

Indian wood panel industry, growth drivers and present trends

Current market scenario in the Indian plywood industry Growth in the housing sector and rapid urbanisation to provide the boost GST rationalization to reduce price difference...

Housing finance market in India. Is affordable housing driving the growth?

Overview of the housing finance sector in India Key players dominating the segment and their dynamics Factors driving aggressive demand for housing   The housing...

Rice industry outlook 2018

Major rice producers and consumers Global rice trade Factors dominating the trade   Rice is the 3 rd largest produced agricultural commodity in the world, after...

Sri Lankan economic and political crisis

Sri Lanka’s latest political crisis, who governs the nation? Poor economic indicators adding to the nation’s woes   Sri Lanka is currently embroiled in a political crisis,...

Blockchain, an emerging concept, a disruptive technology (Part 1)

What is blockchain? How is blockchain revolutionary? Cryptocurrency, the new money ICOs, the new way of raising money Summary Blockchain is a software architecture...

Malaysian rubber glove industry, an update

Rising global demand for gloves Impact of USP 800’s implementation and the US-China trade war on Malaysia’s rubber gloves industry Key challenges for the Malaysian rubber...

Rise of Ant Financial, will the success story continue?

What is Ant Financial? Journey to become king of unicorn Will regulatory curbs hinder its success journey?    Ant Financial, an affiliate and integral part...

Battle for the textile and apparel industry in Southeast Asia

The reasons for China’s decreasing presence in the industry Initiatives by the governments in Southeast Asia to boost the textile trade Vietnam and Bangladesh’s quest to conquer...

Unnoticed growth of the media and entertainment industry in India

Overall industry brief Growth of the M&E industry and its segments Major supporting elements of this growth   Media and Entertainment (M&E) is a very wide industry...

Education industry in India, an overview

Growth of private universities in the nation Future potential of the education industry in India   The education sector in India is estimated to be worth USD 91.7 billion...