Farewell Address to Final Year Students, DOC, DSE.

FM’s Ambitious Economic Reform-Historical Friday, 20^th Sep. 2019

Shashank Vikram Pratap Singh

Ph.D. Scholar

Department of Commerce,

Delhi School of Economics

University of Delhi

ssvikrampratap@gmail.com

On Friday 20^th Sep. 2019, Finance Minister (FM) honourable Nirmala Shitaraman made a highly ambitious & impressive announcement and issued the ordinance to amend the Income Tax Act of 1961 and Finance Act of 2019 to reduce much dearly needed corporate tax rate on domestic and new manufacturing units by 10 to 12 percentage points.  She promptly announced six key decisions. Reduction in corporate tax rate from 30 percent to 22 percent and effective tax rate (including 10 percent surcharge and 4 percent cess) from 30.9-34.61 percent (up to Rs.1Cr. 30.90%; between Rs.1 to10Cr. 33.06%; and exceeding Rs.10Cr. 34.61%) to 25.17 percent. For new manufacturing units set up after 1^st Oct. 2019 and commencing operation by 31^st March 2023 the effective tax rate announced to reduce at 17.01 percent from 29.10 percent earlier. Minimum Alternative Rate (MAT) lower to 15 percent from 18.50 percent for companies availing the facilities of exemption and incentives. No tax on Buybacks announced before budget i.e. 5^th July 2019. CSR funds made available for incubators, universities and research bodies. Waived surcharge on Foreign Portfolio Investment (FPIs) introduced on union budget on 5^th July 2019. It is applicable to all investors be it individual or operating under the structure like Hindu Undivided Family (HUF), Association of Person (AOP), Body of Individual (BOI) or Artificial Jurisdiction Person (AJP). It means any gain arising from sale of securities in the cash or derivatives segment or unit of equity mutual fund on which security transaction tax (STT) has been levied, will not be going under the preview of surcharges.

All these announcements are historical and one of the biggest and highly influential reforms in last 28 years. These reforms are very strong stimulus for the medium and long term prospect of economy. The reduced tax rate positioned India at the most competitive position among her competing peer. The corporate tax rate of competing countries as fallow;

Country	Corporate Tax Rate %
Taiwan	20
Indonesia	25
Phillipines	30
Malaysia	24
Vietnam	20
Thailand	20
Laos	24
Cambodia	20
Myanmar	25
Singapore	17
China	25
Brazil	34
South Korea	27.50

Now corporate tax of China (25%) and Brazil (34%) are higher than India`s tax. It can efficiently generate many possible favourable outcomes. The immediate effect can be sensed from the single day gain of the capital market. The stock market increased to 5.3 percent on Friday and registered the highest single-day gain (1921point rise) in a decade. On 18<sup>th</sup> May 2009, single day point rise was 2111 since then stock market never registered such enormous level of single-day gain. Earlier government targeted and assured to reduced corporate tax over the period of time. In the budget; 2017-18, 2018-19 &2019-20 the tax rate was cut to 25 percent for companies with turnover below Rs. 50 Cr, up to Rs. 250Cr and Rs. Up to Rs. 400 Cr respectively. Government of India (GOI) has already proposed to reduce the tax to 25 percent in the current budget which cover 99.30% of companies. Having announced that, why all of sudden GOI had to make again such big ticket announcements? The alarming condition of health of economy and ambitious aspiration of $5 trillion economy is the possible answer of it. Since last few quarters India`s rate of growth have reached (5%) to 25 quarters low. The rate of consumption is at downward pressure; compare to Oct. 2017 to June 2018 and Oct. 2018 to June 2019, 17 % fewer car and 11 % fewer bike have been sold, compare to last fiscal CAD of 1.8%, 2018-19`s CAD widen to 2.1% of GDP, export remained virtually stagnant, overall saving rate is somewhere 29 per cent from 38% in 2008, household saving rate have declined to 17.2% in 2017-18 from 23.6% in 2011-12. In order to realistically achieve the $5 trillion economy, India has to grow at least 8 per cent per annum for next many years. Without soaring export and saving no country has ever achieved 8% growth rate. But the matter of deep concern is, current state of domestic and global economy which is not moving on a favourable track.

GOI made these reform at a time when there is anti-globalisation sentiments, protectionism, nativism, and trade war between China and US is gaining its momentum. The imposition of tariffs of 25 percent on $300 billion worth of China`s product by US bound the hundreds of MNCs to look for changing their production base from China to some other conducive nation. India is having the best demographic dividend together with reduced tax rate seems to provide the very attractive and favourable spot for prospective investors. Till now Vietnam, Taiwan and Thailand have been getting the benefits of US China trade war, now India is in the best position for all kinds of companies operating in China. Thus reduced tax going to soared the Investment in India economy and hence stimulates the virtuous cycle which is the need of the hours for Indian economy.

There is other side as well. The threat on targeted fiscal number is roaming around. The announced measures going to disturb the fiscal arithmetic and reduced corporate tax estimated to cost Rs.1.45 lakh crore a year. The recent Union Budget 2019-20 assumes net tax revenues of Rs.16.49 lakh crore which is ambitious 25% growth estimate over the actual revenue of Rs.13.16 lakh core in 2018-19. GOI has also taken in to the account of Rs.90000 crore from RBI in the current budget. Bimal Janal led committee gave recommendation to transfer Rs.1.76 lakh crore from RBI to GOI. Hence, GOI has Rs.86000 crore (1.76-90000) additional money than they estimated in the budget. But still there is hole of Rs.59000 crore (1.45 lakh crore- 86000 crore) .The targeted GST collection is not up to the mark and additional estimated reduction of Rs.59000 crore from revenue collection is for sure going to disturb the targeted fiscal deficit of 3.3 percent of GDP.

The medium and long run success of this gamble is going to be very much decided on the intensity, volume and direction of Investment. The puzzle of ‘Demand Creates Supply or Supply Creates Demand’ will be very interesting to solve in the current economic condition of India. It will be interesting to see whether investors only fallow reduced tax stimulus, hence investment fallowed by employment and demand; or increased demand led investment. We have to wait and watch.