The Indian government has cut corporate tax rates across the board to an effective rate of 25.17%. The move is on par with other Asian economies offering tax benefits to generate foreign investments. Thailand has recently reduced its corporate tax to 20%. Indonesia too has planned to bring down its corporate tax.
Similarly, the United States of America had cut its corporate tax rate to 21% in the year 2017. The goal behind the corporate tax rate cut was to ramp up demand in its economy. A high rate of 35% was slashed to embrace a strong economy, high market multiples, and low-interest rates.
The US tax cuts boosted sentiments, drove the US stock markets positively, the earnings, and economic recovery for a couple of quarters. It has been 21 months since the tax cuts, the economic growth has moderated. The GDP growth is down by 1% since its peak. The US stock markets are up only by 5% since the announcement of the tax cut. Also, consumer demand and corporate expectations have moderated, investment has slowed down, and the fiscal deficit has increased.
Like the US, just the corporate tax cuts may not be sufficient to revive economic growth in India. The utilisation capacity of industries is below the optimum levels. Hence, companies may not immediately invest in business expansions. Some capital-intensive companies may retain the money saved in taxes.
Unless consumption demand improves, Indian corporates are likely to use taxes saved for purposes other than business expansion. Thus, corporate tax cuts may not boost immediate economic growth. Nevertheless, the tax cut will give Indian companies a competitive edge over their Asian peers, and help in realising medium-term economic growth.
While the government has eased liquidity concerns for corporate India, the Indian economy awaits a demand revival.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.