In the last few weeks, the Finance Minister announced various measures to stimulate the economy in slowdown. The Indian economy registered a growth rate of 5 percent in the first quarter of FY20, one of the lowest rates in the last 25 quarters. However, the revival measures announced by the Finance Minister didn’t cheer the market much. The trend was reversed today (20th September,2019), with the market celebrating the announcement to slash the corporate tax rate to 22 percent.
Reducing the corporate tax rate was a long pending demand of business. In every budget, the corporate sector expected a tax cut from the Finance Minister. The wait is now over, with corporate tax rate in India getting closer to her peers. At 22 percent tax rate, the effective corporate tax rate in the country stands at 25.17 percent.
The announcement helped in lifting the mood in the economy. The higher taxation level has always acted as an impediment in attracting fresh investment. The move would stimulate the economy, as lower tax rate is a major ingredient to attract investments. Higher investment would lead to increased job creation, higher consumption, and positively impacting the overall economy. Once the issues in land and labour are also resolved, business climate in India will improve to a great extent.
Finance Minister said that the revenue foregone on reduction in corporate tax and other measures would cost the exchequer Rs 1.45 lakh crore. Considering the current slowdown, it would be difficult to attain the tax revenue target, and chances are high that the government would miss the fiscal deficit target for FY20. The surplus transfer from the RBI could do some relief, and if the government is successful in the strategic sale of some of the sick PSUs like Air India, it would fetch some revenue.
In the long run, lower corporate tax rate will benefit the exchequer. One of the major factors for tax evasion is the complicated taxation structure. With a much-simplified taxation structure in place, tax compliance is expected to improve, which will be reflected in the tax revenue.
If these announcements were made in the budget presented on July 5th, the reception of the budget would have been completely different. Some of the measures announced in the budget negatively impacted the sentiments of the market. Finance Minister was also forced to reverse these measures. Better late than never, today’s announcement lifted the spirit.