An audacious move that overcame ‘suit-boot ki sarkar’ fear

   By Power Corridors ,  17-Oct-2019
An audacious move that overcame ‘suit-boot ki sarkar’ fear

Slashing the tax burden on Indian companies is a good move, but the government needs to carry out more reforms

It was on September 20 that the Narendra Modi government took a serious decision to check slowdown, help business, and boost investor sentiment. It did that by slashing the corporate tax rate by almost 10 per cent, thus making India competitive vis-a-vis east Asian countries.
At a press conference in Goa, Finance Minister Nirmala Sitaraman announced major changes in the corporate tax structure. In order to promote growth and investment, a new provision has been inserted in the Income-tax Act with effect from the current fiscal to allow any domestic company an option to pay income-tax at the rate of 22 per cent subject to condition that it will not avail any exemption or incentive. The effective tax rate for these companies shall be 25.17 per cent, inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
The government offered an even bigger sop to boost the sagging manufacturing sector by further lowering the corporate tax rate. Also applicable from this fiscal, any new domestic company incorporated on or after October 1, 2019, making fresh investment in manufacturing will have the option to pay income-tax at the rate of 15 per cent. This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before March 31, 2023. The effective tax rate for these companies shall be 17.01 per cent, inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period. After the exercise of the option, they shall be liable to pay tax at the rate of 22 per cent and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5 per cent to 15 per cent.
The government also waived off the enhanced surcharge introduced by the Budget on capital gains arising on sale of equity share in a company or a unit of an equity-oriented fund or a unit of a business trust liable for securities transaction tax. The enhanced surcharge, an official press release said, shall also not apply to capital gains arising on sale of any security including derivatives, in the hands of foreign portfolio investors (FPIs). Further, to provide relief to listed companies which have already made a public announcement of buyback before July 5, 2019, tax on buyback shall not be charged.
The government expanded the scope of CSR spending. Now the CSR fund can be spent on incubators funded by the Central and state government, any agency or public sector undertaking, and making contributions to public funded Universities, IITs, national laboratories, and autonomous bodies.
This announcement couldn’t have come at a better time for India Inc. The slew of measures to help the beleaguered business class and boost the sagging economy in general show that the Narendra Modi government is responsive to the feedback from the ground.
The capital market responded jubilantly to the new announcements, with the benchmark BSE shooting over 1,700 points; the Nifty too jumped around 4.8 per cent.
India Inc also responded enthusiastically. “The Finance Minister’s mega corporate tax stimulus is a major move to boost investors’ sentiments, encourage manufacturing, and awaken animal spirits in the economy,” Confederation of Indian Industry president Vikram Kirloskar said in a statement. This move also indicates that the government is adopting a tax stimulus route rather than using higher government spending route to help the recovery process of the economy, he added.
Ficci chairman Sandeep Somany also expressed similar sentiments: “These announcements will give a major boost to the animal spirits of corporate India and will reinvigorate the manufacturing sector that has been going through a difficult phase of late. Lowering of income tax on corporates is a long standing Ficci request. With the kind of corporate tax rate cuts announced today, India now becomes a competitive market in the region with our rates similar to those prevailing in the Asean countries.”
This is a very audacious step, for the total revenue foregone as a result of the rate cuts is in the region of Rs 145,000 crore—a big number against the backdrop of dropping gross domestic product (GDP), low revenue mop-up, a looming oil crisis, and a tight fiscal situation.
The audacity, however, is not reckless, for it is based on a sound economic principle: lower tax rates result in higher revenue collection. On the face of it, this looks like a mathematical monstrosity, but in the real economy a lower tax incidence boosts people to invest more which, in turn, increases economic activity, augments production, and creates jobs. More jobs mean more people spending more money and generating more profit for businesspersons, further boosting investment, production, and employment. Hence the virtuous circle.
It needs to be mentioned here, though, that lower tax rates are the necessary but not sufficient condition for high growth. While the steps announced are indeed welcome, we should not forget that these are part of a firefighting exercise, not the consequence of some systemized thinking with a vision for the future and with clearly defined short-, middle-, and long-term goals. Neither do they reflect any (newly-found) predilection on the part of the Narendra Modi government for structural reforms, which are the need of the hour. At best, the exercise is an economic reaction, though very good; it is certainly not the dawn of economic philosophy.
Further, the announced measures exemplify the adage that economic reforms happen in India only under duress. In 1991, there was an unprecedented crisis of mammoth proportions, so the policy and decision makers scrambled to fix the system. The result was liberalization, a watershed moment in the economic history of India.
We need to point out here is that 1991 was also an economic reaction (albeit very appropriate), not the commencement of a system untouched by the pathologies of socialism and the flowering of a new, freedom-oriented philosophy. Unsurprisingly, the grammar of political economy and phraseology of public discourse continued to be infected with the germs of discredited ideologies like socialism and statism.
While we ought to temper optimism with caution, we should also not overlook the fact that lowering of the corporate tax rate could be done only by a strong, resolute, and confident government, a government that doesn’t fear the jibes of being pro-rich and thus anti-poor, a government that gives two hoots to a taunt in the category of ‘suit-boot ki sarkar.’ After a long period, the Modi government seems to have shed its diffidence to make bold and meaningful moves. Slashing the corporate tax rate is one of them. 


RBI cuts repo to 9-yr low

The Reserve Bank of India’s Monetary Policy Committee (MPC) recently slashed the repo rate by 25 basis points, bringing it down to its nine-year low at 5.15 per cent. This is the fifth time since February 2019 when the rate has been reduced. There seems to be unanimity in the central bank on the desirability of cheaper money, evident from the fact that every MPC voted for the cut, with one member actually favoring an even lower repo.

The cut follows the RBI’s concern about the slowing growth; it brought down GDP expansion for the current fiscal from 6.9 per cent in August down to 6.1 per cent in its latest review; this is lowest in the last seven years. This is a realistic reading of the ominous signs—sluggish core infrastructure index growth, struggling industrial index of production, low automobile sales, weak services sector purchasing managers index (PMI) showing, unimpressive rural demand, fall in capacity utilization of manufacturing firms.

Confusing signals

While the Narendra Modi government has been bold in cutting the corporate tax rates, there is little clarity about the defining feature of its economic policy. Sometimes it appears to be wedded to reforms, whereas there are moments when it looks opposed to free markets. There is a new thrust on privatization, as also on price controls.

The government has okayed the privatization of five public sector undertakings (PSUs), and that includes big companies. It aims to mop up Rs 60,000 crore from the exercise. The disinvestment target for 2019-20 is Rs 1.05 lakh crore. The five PSUs on the block are Bharat Petroleum Corporation (BPCL), Shipping Corporation of India (SCI), Concor, North Eastern Electric Power Corporation (NEEPCO), and THDC.

At the same time, there are reports that the government may introduce price caps for antibiotics. As it is, healthcare is burdened with price controls; expansion of the price control regime will further hurt the sector.