Indian Government to Adopt Steps to Become a $5 trillion economy

The Government of India aims to make the Indian economy a US$5 trillion economy by FY 2024-25. Our Finance Minister announced corporate tax cuts on 20 September 2019. Under the ‘Make-in-India’ initiative, new manufacturing companies are set to benefit from a low corporate tax rate.

The effective corporate tax rate has been brought down to 25.17% from the financial year 2019-20. The government has given an option to the existing corporates claiming tax exemptions to switch over to the lower corporate tax regime. Also, the tax rate is 17.16% for new manufacturing companies. The new company should be set up on or after 1 October 2019 and should commence manufacturing on or before 31 March 2023. 

Also, such corporates which have opted for the lower tax regime would not be required to pay MAT (Minimum Alternate Tax). The MAT rate would be 15% for all other companies liable to pay taxes under MAT. 

The corporate tax benefits make Indian corporates competitive among other Asian and Southeast Asian economies. Our tax rates are now equal to or lower than that of Japan, South Korea, China, Indonesia and Bangladesh. The elimination of corporate tax exemptions will eliminate tax disputes and harassment from tax officials. Corporates would now prefer to revive investments and make fresh investments.

Also Read: Slash in personal tax rate to boost the consumption in the economy

After addressing the liquidity issues for the corporates, a similar benefit can also be given to the end consumers. The Direct Tax Code report has recommended the lowering of tax rates for individual taxpayers. The exemptions and deductions should be brought in line with the present cost of living for individuals. The peak rate of 30% can be brought down to 25%. Similarly, the tax rate of 20% can be brought down to 10%. 

The lower tax rates would help expand the tax base. Further, the tax policy needs rationalisation with minimal exemptions and introduction of a higher standard deduction. The government should not reopen tax assessments for past assessment years. 

India needs to pursue further reforms in the area of labour law, privatisation of public sector enterprises, land reforms and policy reforms in infrastructure. 

While the corporate tax cut would make the industry competitive, the other reforms would boost consumer spending, improve the infrastructure, monetise unused assets and create employment. This would help India move towards the goal of US$5 trillion economy by FY 2024-25.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in