Tax relief to kick-start capex plan, revive corporate sentiments: Tax experts
The government’s big bang announcement of slashing corporate tax rate will revive corporate sentiments, provide impetus to companies to kick-start capex plan, improve compliance and give India a competitive slot amongst leading economies of the world, tax experts said on Friday.
Vikas Halan, senior vice president, Corporate Finance Group, Moody’s Investors Service said the government’s decision to reduce base corporate tax to 22 per cent from 30 per cent will boost net income of Indian corporates and is credit positive.
“Extent of final impact on credit profiles of Indian corporates will depend on whether they utilize the surplus earnings for reinvestment in business, debt reduction or high shareholder returns,” he said.
ICRA Ltd’s Principal Economist Aditi Nayar said the announcement will provide a big boost to business sentiment in the immediate term, with a modest knock on impact on consumption demand, particularly for big ticket items.
“However, the impact on fresh investment activity may be visible with a lag,” she said. “Today’s announcement would complement the expected further Repo rate cut in the October 2019 policy review. We continue to expect a 25 basis points rate cut in the upcoming MPC review.”
She said while a fiscal slippage now appears inevitable given that the government’s tax collections will fall substantially short of its Budget estimates, expenditure cuts may still be required to prevent the fiscal deficit rising too sharply.
“In light of the likely backended pickup in investment activity and expenditure restraint that would be required, particularly at the state government level, we are not yet revising our FY20 GDP forecast upward from 6.2 per cent,” she added.
Vikram Doshi, Partner – Tax and Regulatory, PwC India, said reduction of corporate tax rate for new manufacturing companies to 15 per cent and for existing manufacturing companies to 22 per cent will give impetus to the ‘Make in India’ initiative by making the country a competitive destination for global investments.
Rajesh H Gandhi, Partner, Deloitte India said the corporate tax rate now is even lower than China’s rate of 25 per cent which comes down only for certain preferred sectors.
Also, the clarification that all capital gains earned by FPIs will be exempted from the higher surcharge will benefit debt funds, he said.
Vikas Vasal, Partner and National Leader – Tax, Grant Thornton India LLP said the reduction is a significant move to boost investor confidence and revive business sentiment.
“With this, the government has addressed the key demand of businesses to align India’s corporate tax rate with the current economic reality where most large economies like the USA and the UK have taken similar measures to attract capital and investments,” he said.
While K R Sekar, Partner, Deloitte India said the tax cut would encourage competitiveness and also minimise tax cash outflows which would be ploughed back into economy.
Frank D’Souza, Partner and Leader Corporate and International Tax, PwC India, said the changes to CSR contributions and relief on buy-back tax will address past concerns and also help in channelling funds towards R&D initiatives.
“Hugely positive step, this will conserve much needed funds in the hands of corporates to turbo charge investments leading to more employment and capacity creation. This move will also reduce litigation on contentious issues around incentives,” said Hitesh D Gajaria of KPMG in India.
Ashok Shah, Partner, NA Shah Associates LLP, said companies having turnover of less than Rs 400 crore will still be able to claim all exemptions/incentive which are available and pay tax at the rate of 25 per cent. In the alternative, such companies can opt to pay tax at the rate of 22 per cent without claiming any exemptions or incentives. Since the gap is only 3 per cent, for companies availing tax benefit/incentive, benefit may be marginal.
Companies having turnover of over Rs 400 crores will see larger benefits. “They can continue to claim exemption/incentives and pay tax at the rate of 30 per cent. In the alternative, they can pay tax at the rate of 22 per cent without claiming any exemption/incentives,” he said.
“This is an extremely important and very courageous move which should give a significant push to the market and industry. We hope this move is expected to unleash the animal instinct in the Indian industry and put the economy back on the high growth,” said SR Patnaik, Partner and Head – Taxation, Cyril Amarchand Mangaldas.
Sudhir Kapadia, National Tax Leader, EY India, said the new tax rates also catapults India amongst the most attractive investment destinations vis-a-vis many ASEAN countries, making India well placed to avail of investment opportunities in the global supply chains being disrupted due to the ongoing tariff war between US and China.
Arun Singh, Chief Economist at Dun and Bradstreet, said the tax cut is expected to revive the corporate sentiment and provide an impetus to the corporate to kick-start their capex plans.
“Low business optimism, low returns on capital invested by the corporate in the non-financial sector and increase in inefficiency in capital employed, indicated by increasing incremental capital output (ICOR) ratio, raises concerns over pace of revival in investment,” he said.
Investment demand indicated by gross fixed capital formation which used to be around 35 per cent in 2013 has fallen to 32 per cent currently.
Vikas Vasal of Grant Thornton India LLP hoped the government follows this with similar tax rate reduction for individuals and other taxpayers soon as the festive season approaches. “This would leave more money in the hands of the taxpayers, which in turn would boost overall demand and consumption in the economy.”
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said the move will negatively impact the bond market as the revenue forgone due to the tax rate reduction will make it difficult to stick to the fiscal deficit target.