NEW DELHI :
The move to cut corporate tax rates is a bold measure that will make India an attractive destination for foreign investors, Reserve Bank of India (RBI) governor Shaktikanta Das said on Tuesday, days before the monetary policy committee (MPC) meeting set to begin on 1 October.
“It is a very bold measure, and it is a highly positive step. India’s corporate tax now becomes very attractive compared to other emerging market economies in Asean (Association of Southeast Asian Nations) and other parts of Asia. So far as international investors are concerned, so far as FDI (foreign direct investment) is concerned, I think India stands definitely in a very competitive position and should be able to attract higher investments," Das said.
Finance minister Nirmala Sitharaman on Friday slashed corporate tax rates worth ₹1.45 trillion paid by domestic manufacturers, making the country one of the lowest tax regimes in Asia to reverse the economic downturn and make India an attractive investment destination. The effective tax rate, including cess and surcharges, for existing companies comes down from 34.94% to 25.17%, while for new companies, it falls from 29.12% to 17.01%. Sitharaman also announced a reduction in the rate of minimum alternate tax (MAT) from 18.5% to 15%.
With a lower tax, domestic companies will be left with more cash, Das said. “So they will be able to undertake more capital expenditure and can invest more. Some of them can deleverage their liabilities, which will add strength to their balance sheets," he added.
The governor said the meeting with the finance minister was a customary one ahead of a monetary policy meeting. “There is a long tradition that the governor meets the finance minister and discusses the overall macro-economic position. So today’s meeting was basically that," he said.
The three-day MPC meeting will be held amid expectations of a rate cut announcement on 4 October.
The central bank has already cut rates four consecutive times by a cumulative 110 basis points this year to push growth. Analysts, however, expect RBI to be more cautious in cutting policy rates from now as the fiscal impact of the government’s largesse for the corporate sector could reduce revenue collections by 0.7% of gross domestic product (GDP).
Indian businesses have been battling a demand slowdown and a liquidity crunch, which have resulted in the economic growth rate cooling to a six-year-low of 5% in the June quarter, while private consumption expenditure was at an 18-quarter-low of 3.1%. RBI has been trying to improve liquidity in the system and lower the cost of funds through a series of steps, including the four interest rate cuts since January, bringing the repo rate down to 5.4% in August.