Boom Time! Corporate tax rate cut to 25% in Nirmala Sitharaman 'mini-Budget'; experts react

FM Nirmala Sitharaman, in what has been dubbed as yet another mini-Budget (she had announced sops for real estate industry as well as exporters just weeks ago), slashed corporate taxes in a surprise break aimed at reviving private investment, seeking to lift economic growth from a six-year low. Finance Minister Nirmala Sitharaman told a news conference that the effective corporate tax rate will be lowered to around 25% from 30%, which she said would be on par with Asian peers, an announcement that triggered a more-than-3% jump in stock markets.

"With effect from financial year 2019-20 ... any domestic company has an option to pay income tax at the rate of 22%, subject to condition that they will not avail any exemption," the minister said.

The effective tax rate for such companies will be around 25%, inclusive of surcharges, she said.

The total taxation revenue loss due to the measure would be 1.45 lakh crore rupees ($20.5 billion), Sitharaman said, raising concerns that the government may not be able to meet its fiscal deficit target of 3.3% for 2019-20 at a time when tax revenue collections are already weak.

That concern was felt on bond markets, which saw yields rise to a near three-month high on speculation that the government may have to borrow more to meet its expenditure needs for the year.

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SADANAND DHUME, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON DC
"This is a significant move by India to reassure the business community that the Modi government is not hostile to their interests. But by itself it may not be enough to revive the investment climate. The government will need to take other measures — such as privatising loss-making state-owned firms, simplifying an overly complex national value added tax, and reforming labour laws — to show that it can pull Asia`s third-largest economy out of the doldrums."

RAJESH CHERUVU, CHIEF INVESTMENT OFFICER, VALIDUS WEALTH, MUMBAI
"The finance minister`s proposal to slash the effective tax rate to 25.17% for all domestic companies and 17.01% for fresh investment in companies incorporated after Oct. 1, 2019 which is engaged in manufacturing would certainly boost the investment in `Make in India`. Further, for such companies, the minimum alternate tax provisions would not be applicable, which is a big relief. It is not clear if there are any conditions or limits on turnover for claiming the benefits of the reduced corporate tax rate. One will have to wait for detailed proposal."

VK VIJAYAKUMAR CHIEF INVESTMENT STRATEGIST, GEOJIT FINANCIAL SERVICES, MUMBAI
"The measures announced by the FM this morning can be described as a `New Deal` for the Indian economy. Reduction in corporate tax rate to 22% (25.17% effective rate) and for new manufacturing companies to 15% and reduction on MAT are big boost to investment. The psychological stimulus from this `New Deal` will be higher than the fiscal stimulus. Animal spirits will respond positively. The message from Dalal Street is a clear signal. Bold move indeed!"

JIMEET MODI, FOUNDER & CEO, SAMCO SECURITIES & STOCKNOTE, MUMBAI
"The reduction to 22% in corporate taxes will result in massive release of 1.45 trillion rupees immediately in the economy, which will boost sentiments and bring in real surplus to the corporates. Companies in consumer finance, banks, and hotels that pay upwards of 32% tax will have maximum benefits. However, rest of the sectors will have a nominal positive impact. This is a path-breaking move delivered by Modi 2.0 government in the interest of economy at the cost government exchequer in times of crises which will go down well in the history."

MOHANDAS PAI, CO-FOUNDER, AARIN CAPITAL, BENGALURU
"The change in tax rates will make a dramatic impact on corporate India, increase investible funds, reduce cost of capital, improve EPS and valuation, reduce overall costs, improve India`s productivity and competitiveness and lead to a flood of imports! A remarkable `Dream Mini Budget`
"Positive for startups as their cost of capital will come down, funding will increase!
"We need to see how tax administration will be changed to reduce or eliminate tax terrorism; tax targets has to be reduced! Tax disputes have to be reduced and `tax justice` needs to be ensured: we need big reforms in this area too as was done today for tax rates! But doing away with exemptions will definitely reduce tax disputes! Overall, a great day for India."

RUPA REGE-NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCE HOLDINGS, MUMBAI
"I am not sure how lower tax rates would incentivise companies to increase the capex when private consumption engine has lost steam."
"We need to wait and watch. These broad-brush measures should be complemented with sector-specific corrective measures to restore investor confidence. However, these measures will have a positive impact on the sentiment."

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI
"This is a major announcement. Corporate tax cut is not a zero-sum game. It is likely to improve cash flows for companies and lead to more investment by them. Companies in turn are likely to pass on the benefits to consumers ahead of the festive season."
"This is inarguably the best and quickest way to boost private consumption, which has been playing drag on growth. Although this rate cut will have an impact on government finances, the government has shown that growth is its top priority right now."

DEEPAK JASANI, SENIOR VICE-PRESIDENT, HDFC SECURITIES, MUMBAI
"The markets have expectedly reacted very well to the relief measures announced today. The loss in terms of tax revenues will take time to be offset by the higher tax revenues gained on consumption (out of higher dividends/buybacks announced by corporates due to corporate tax savings) or investments in new facilities by corporates out of their savings."
"In the meantime, fiscal situation could see some pressure. This could impact the interest rates unless the compensating liquidity from FPIs and FDI is large enough."
"Reaction of FPIs to these impacts will be keenly observed. The markets could give some time for the above impact to trickle down before going back to cautious stance."
"Stressed corporates may, however, not benefit as the reliefs may not apply to them, and as no GST reliefs have been announced. Large change in PSU divestment policy and changes in land, labour and judicial reforms may be more keenly awaited now than ever before."

SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI
"It is a prudent move to reduce the corporate tax rates because it increases the retained earnings of the companies and forms the investible surplus for future."
"It also moves India to parity with its regional peers, thereby removing one of the issues related to manufacturing and exports."
"Further, the cuts maintain macro prudence by continuing to favour investment cycle rather than consumption cycle."
"On the flip side, it will negatively impact the bond market as the revenue forgone due to the tax rate reduction will make it difficult to stick to the GFD/GDP budgeted target."

SUNIL SHARMA, CHIEF INVESTMENT OFFICER, SANCTUM WEALTH MANAGEMENT, MUMBAI
"This was much needed and clearly demonstrates the commitment of the government to rejuvenate growth."
"With fiscal and monetary forces working in tandem and meaningful reforms being announced, and additional monetary easing on the way, we believe sentiments will bottom and begin to revive."
"The move in the markets in itself is a wealth effect and will spur further financialisation and efficient capital allocation."

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A. PRASANNA, HEAD OF RESEARCH, ICICI SECURITIES PRIMARY DEALERSHIP PVT LTD, MUMBAI
"This is a long overdue and hugely positive move by the finance minister. Nearly 50% of the companies were paying effective tax rate of below 30% under current rules. The new rates simplify the tax architecture and will give a fillip to investments and jobs. This is the first concrete step towards realising Make in India."
"The fiscal impact will be large, but right now the need for economic recovery should take priority. I expect the RBI to accommodate this fiscal expansion via additional open market operations to keep interest rates in check."

MAHENDRA KUMAR JAJOO, HEAD OF FIXED INCOME, MIRAE ASSET GLOBAL INVESTMENTS, MUMBAI
"On one side is the reality that 1.45 trillion rupees is sacrificed. On the other side is the hope that it will be recovered through economic recovery."
"This kind of a revenue recovery will be pretty challenging. So right now, it is negative for bonds and positive for equity markets."

AJAY BODKE, CEO PMS, PRABHUDAS LILLADHER, MUMBAI
"In a major boost to revive flagging animal spirits and position India as one of the most attractive business destinations, the government has announced a slew of measures that would act as a force multiplier for the flagging economic engine. By slashing corporate tax rate to 25% from 35% (22% from 30% without exemptions) for existing domestic companies and an extremely attractive rate of 15% for new companies setting up manufacturing operations after Oct. 1, 2019 and commencing operations before 2023, the government has rolled out a red carpet that would ensure hundreds of billions of dollars of FDI and FII flows over the medium term."