India has cut its local business tax to one of the lowest rates in Asia, while providing a more than US$20 billion boost to revive economic growth from a six-year low.
Tax on all domestic companies has been lowered to 22 percent from 30 percent, Indian Minister of Finance Nirmala Sitharaman said yesterday.
The effective new rate is to be 25.2 percent when all additional levies are included and is only applicable for companies.
The new tax structure has been backdated and took effect on April 1.
Companies formed on or after Oct. 1 would pay a base tax rate of 15 percent and an effective rate of 17.01 percent, she said.
That is the same level as in Singapore.
The reduction in corporate tax rates follows a series of steps to boost demand and investment after growth slowed to 5 percent in the second quarter.
The move puts India’s tax rate on a par with its Asian peers and would boost efforts to attract investment as companies look for alternative destinations to sidestep supply-chain disruptions from the US-China trade dispute, the government said.
“These are massive steps to make India competitive,” said Amit Maheshwari, a partner at Gurugram, India-based tax consultancy firm Ashok Maheshwary & Associates LLP.
“This will help attract significant FDI [foreign direct investment] and manufacturing to India,” Maheshwari said.
The changes would promote growth and investment, Sitharaman said, adding that they would cost the government 1.45 trillion rupees (US$20.41 billion) of revenue.
The government had estimated tax revenue of 16.5 trillion rupees in the year to March next year.
“We are conscious of the impact all this will have on our fiscal deficit,” said Sitharaman, who has targeted narrowing the budget deficit to 3.3 percent of GDP this year.
Reserve Bank of India Governor Shaktikanta Das welcomed the announcement, calling it a “bold move.”
Indian Prime Minister Narendra Modi has been under pressure from industry groups and political opponents to use the fiscal space afforded to him last month by a more than US$24 billion windfall from the central bank.
“The unexpected fiscal stimulus is positive for sentiment,” Singapore-based Oxford Economics India and Southeast Asia economics head Priyanka Kishore said. “Investors will watch closely on how the potential damage to the budget deficit is managed.”
Indian stocks surged with the rupee while bonds slumped after the government unexpectedly slashed the corporate tax rate to boost economic growth.
The benchmark BSE Sensex jumped 4.5 percent, poised for its best gain since May 2009, led by banks and automakers.
The rupee climbed 0.7 percent against the US dollar, while the yield on 10-year government bonds surged 17 basis points to 6.81 percent, the most for the benchmark notes since Feb. 2017.
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