FM’s tax cuts a calculated risk

Finance Minister Nirmala Sitharaman’s decision announced on Friday to give away tax revenues worth Rs 1.45 lakh crore in the form of reduction in corporate taxes to 25.01% is a calculated risk taken to spur investments and growth. At a time the growth in tax revenue has been severely muted in the first quarter and revenue targets for the fiscal are very stiff, the lowering of corporate tax rates, minimum alternate tax, withdrawal of tax on buyback issues and rescinding high surcharge on capital gains made by foreign portfolio investors and sale of securities by individuals is significant. There’s a cautionary tale from September 2009: Pranab Mukherjee’s economic stimulus package — a combination of high public spending and rejigging of taxes — did not work. Instead, the lingering impact of the measures led to high inflation and interest rates, and large deficits that were hard to bridge in the following years. A back of the envelope calculation shows that the fiscal deficit could expand by at least 0.4-0.7% after the latest tax. And that even if the overly optimistic tax revenue target of Rs 23 lakh crore is achieved this fiscal.

On the other hand, the reduction in corporate tax rates effectively to 25.17%, which is competitive vis-a-vis tax rates in Asian economies like the Philippines, has made India an attractive destination for investments. This is a welcome development. The 17.01% tax rate offered to new companies setting up production capacities between October 1, 2019 and March 2023 will help attract FDI and ‘Make in India’ could take off. The government can now market India as a low tax destination for investors globally, and Prime Minister Narendra Modi could well begin the exercise in Texas. The withdrawal of high surcharge on equities sold in the market and on capital gains made by FPIs has had its impact. The stock market spurred to life with a 1,921-point vault and the rupee gained 62 paise against the dollar.

While cashing in on the positive mood among investors and market, the government will have to devise ways to mobilize revenues and reduce the fiscal pain it may have given itself. That is a challenge, given that growth impulses are down and much of the positive impact of Friday’s measures will be felt only in due course. Taking challenges head-on with bold measures is not a bad idea. But how these measures will play out needs to be seen. Now, there’s no reason why Indian companies should hold back investments in greenfield projects or expansions. Foreign investors and portfolio managers will have to complement government spending and help spur growth and jobs.