Business, investor and consumer sentiment in India is largely driven by taxes. The first two should ideally be driven by macroeconomic factors and company fundamentals, but this is rarely the case — and even for businesspeople and investors for whom these two factors matter, they do not matter as much as taxes.
Finance minister Nirmala Sitharaman’s decision to cut the corporate tax rate to a flat 22% (25.17% with cess and surcharge) for companies willing to give up all exemptions should be seen in this context. In one move, the finance minister has made corporate tax rates in India among the lowest in South East Asia. She has, for companies that want it, made tax compliance easier, thereby making it easier to do business in the country. The move will cost the government Rs 1.45 lakh crore (roughly $20 billion). It could, as some experts have pointed out, help attract more investment to India and create jobs in the long-term. But its more significant impact is in the short-term, as indicated by the 1,921 points (5.32%) rise in the benchmark BSE Sensex on Friday.
All other things being equal, the tax cut will see the fiscal deficit rising to almost 4% from the budgeted 3.3%. But India was never going to make that target anyway, not with the economy slowing. And it was, in any case, surprising to see the finance minister focus strongly on managing the fisc in the July Union Budget, when the need of the hour was clearly a stimulus to boost the economy. The finance minister has thus far announced five sets of measures to boost the economy, including some sharply focused on small and medium enterprises that have been the worst affected by the slowdown. More may be needed — a substantial rate cut by the Reserve Bank and the equivalent of the corporate tax cut for individuals, which makes them feel good — and the indications are that they may follow.They may have been some time coming, but, together, they send out a clear signal that the government recognises there is a slowdown and that it will do whatever it can to address it. They also send out a signal that even while doing so, its focus will remain on small businesses and investors, local and foreign.
{{/usCountry}}All other things being equal, the tax cut will see the fiscal deficit rising to almost 4% from the budgeted 3.3%. But India was never going to make that target anyway, not with the economy slowing. And it was, in any case, surprising to see the finance minister focus strongly on managing the fisc in the July Union Budget, when the need of the hour was clearly a stimulus to boost the economy. The finance minister has thus far announced five sets of measures to boost the economy, including some sharply focused on small and medium enterprises that have been the worst affected by the slowdown. More may be needed — a substantial rate cut by the Reserve Bank and the equivalent of the corporate tax cut for individuals, which makes them feel good — and the indications are that they may follow.They may have been some time coming, but, together, they send out a clear signal that the government recognises there is a slowdown and that it will do whatever it can to address it. They also send out a signal that even while doing so, its focus will remain on small businesses and investors, local and foreign.
{{/usCountry}}A column in Hindustan Times recommended last Sunday that one way to address the slowdown would be to throw the kitchen sink at it. We’re getting there.