New Delhi: India will have to respond in kind to the trend of developed countries, such as the US, lowering their corporate tax rate to ensure that it remains an attractive destination for foreign capital and prevent the erosion of competitiveness of domestic companies, said chief economic adviser (CEA) Arvind Subramanian.
The corporate tax rate was slashed to 21% from 35% after the US adopted the Tax Cuts and Jobs Act in December, aimed at making businesses invest locally and to incentivise and repatriate profits held abroad.
Apple Inc. on 17 January responded to the tax cut by announcing that it will spend $350 billion in the US over the next five years to help the US economy and create local jobs.
“Nobody is preventing us from responding to it. If you want to be investor-friendly, you need to have policies to do that," Subramanian said in response to a query on the impact of the US tax cut on investments in India.
In an interview, two days before the presentation of the fifth and final full-year budget of the Narendra Modi-led government, Subramanian said India can’t just sit and watch as other countries, especially European economies, respond in kind. “With the changing world in mind, we need to factor in as to how we should design our own tax policy. The government has already announced cutting corporate tax to 25%. The question is, should we look at some of these targets and numbers afresh," he added.
The chief economic adviser said the government is working on a new direct taxes code for which a panel (led by Arbind Modi, member, Central Board of Direct Taxes) has been set up.
Subramanian said that once GST revenues stabilize, the government will be in a better position to cut corporate tax rates. He, however, declined to comment on whether Budget 2018 may offer any direction on the subject.
In his Economic Survey 2017-18, Subramanian argued strongly for urgent measures to revive investments and to “conjure the animal spirits in the economy".
In his 2015-16 budget, Jaitley had announced the government’s intention to phase out corporate tax exemptions gradually while simultaneously bringing down the corporate tax rate to 25% from the prevailing 30% over the next four years. However, in his 2017-18 budget, Jaitley reduced the tax rate for companies with annual revenue of less than Rs50 crore a year and for new manufacturing companies to 25% from 30%. The idea is to bring larger companies into the lower tax bracket gradually.
In a pre-budget survey of chief executive officers by KPMG India, a majority of respondents said they believe the US tax reforms are likely to lead to a reduction in corporate tax rates in Budget 2018.
“The international tax environment is changing radically. A majority of our respondents also feel that the US tax reforms will have a significant impact on Indian companies with US-based businesses," KPMG said in its report on Tuesday.
“There is a case for reducing corporate tax rate to make businesses more competitive as had been announced earlier, subject to revenue considerations. I do expect a cut in the forthcoming Union budget for 2018-19," said Rahul Garg, partner, PwC India.
Industry lobby groups, too, in their pre-budget presentations to finance minister Arun Jaitley, had urged the government to cut corporate tax rates in view of the US Congress approving the tax overhaul.
Foreign direct investments (FDI) into India marginally rose to $45 billion in 2017 at a time global flows of FDI fell by 16% to $1.52 trillion. India liberalized its FDI regime in aviation and single-brand retail earlier this month to attract investments ahead of Prime Minister Narendra Modi’s visit to Davos to attend the World Economic Forum (WEF). Modi signalled that India is open for business and invited top business executives to invest in India.
German Chancellor Angela Merkel told the WEF last week that Europe should not complain when other countries overhaul tax systems but instead respond with reforms of their own, Reuters reported. The UK and France are also in the process of gradually cutting corporate tax rates.