The cut in corporate tax rates on Friday will play a major role in reviving economic growth, which slumped to 5% in the June quarter, besides improving the investment climate and pushing private sector capex, said industry leaders.
A slowing economy and consumer demand slump, amid banking sector woes over non-performing assets and the liquidity crunch facing non-bank lenders, had fuelled uncertainties and volatility in the Indian market.
The government announcement to cut basic corporate tax rate for domestic firms from 30% to 22%, and for new manufacturing firms from 25% to 15%, is a “bold move" that will make Indian firms more competitive on the global stage, said senior leaders and company executives. It will also help attract significant investments from foreign and long-term investors.
“The government’s decisive steps to pump-prime the economy will lead to a big reset and revive animal spirits in corporate India. The reduction in corporate tax rates will not only lead to economic buoyancy, but will also make Indian industry more competitive globally," said Kumar Mangalam Birla, chairman, Aditya Birla Group. The steps will also lead to a paradigm shift in the mindset, Birla added.
The move is likely to help the Centre achieve the target of growing India’s exports to $1 trillion in the next five years, as lower taxes will help homegrown firms compete with global peers. In 2018-19 India’s exports crossed the half-a-trillion-dollar mark to clock $537 billion. While goods exports were at an all-time high of $331 billion, services exports were at $205 billion.
Uday Kotak, executive vice-chairman and managing director, Kotak Mahindra Bank, said the government’s decision will level the playing field and allow Indian companies to compete with those in lower-tax jurisdictions.
Industry leaders also expect the move to boost industry sentiment and lead to a revival in capital expenditure.
Mint reported on 2 July that investments in new projects had plunged to a 15-year low in the June quarter, citing data of the Centre for Monitoring Indian Economy (CMIE). Indian firms, across private and public sectors, announced projects worth ₹43,400 crore in the June quarter, 81% lower than in the March quarter, and 87% lower than a year ago.
“We are certain that this Big Bang reform will kick-start the economy. Surplus funds available to firms will be invested in capex and talent," said Ajay Piramal, chairman, Piramal Group, adding non-banking financial firms will be able to save ₹250-300 crore, which can potentially be redeployed as loans. The move to tax new manufacturing firms set up after 1 October at 15% will prove to be a significant boost to entrepreneurship and is expected to strengthen the micro, small and medium enterprises (MSME) sector, which are key cogs in the industrial supply chains. The move “will unleash the entrepreneurial spirit of new India", said Vedanta chairman Anil Agarwal. “The revised rate of minimum alternative tax will pave way for new investments from startups and MSMEs; to create a robust ancillary ecosystem," he added.
Amit Panday, Tanya Thomas and Kalpana Pathak contributed to this story.