Corporate tax cut: Govt will not cut spending, says FM Sitharaman

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Published: September 23, 2019 2:52:07 AM

The finance minister said the government would focus on 23 CCEA-approved firms for disinvestment this fiscal and expressed optimism that Air India will be fully divested.

However, the FM made it clear that the government had no plan now to trim personal income tax rates.However, the FM made it clear that the government had no plan now to trim personal income tax rates.

Finance minister Nirmala Sitharaman on Sunday clarified that the sharp cut in corporate taxes would not crimp government expenditure. The lower tax rate would dramatically improve India’s competitiveness, she said, pointing out that if players like Apple chose to set up shop in India, it would send out a big signal to the global investor community.

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Sitharaman asserted there would be no cutback in expenditure to compensate for the potential revenue forgone of Rs 1.45 lakh crore in FY20 due to the sharp cut in corporate tax rates of nearly 10 percentage points. On the contrary, the FM said expenditure secretary Girish Chandra Murmu has been holding weekly meetings with senior officials of various departments to monitor the pace of expenditure. The laggards, she added, are being pulled up.

India could now potentially draw foreign investors scouting for locations to beat the impact of the US-China trade war, as no country in South Asia offered a standard corporation tax rate of 15%, the FM said. The tax cuts, she argued, would not just boost domestic investment but also lead to demand-side growth, as these two were inter-linked.

Apart from the huge cut in the effective corporate tax rate to 25.17% from 34.94% (for new units, the rate will be just 17.01%), the absence of any sunset clause attached to the lower rates further enhances its attractiveness, she pointed out.

Any move to raise the corporate tax rates from this point will not be easy, as anyone wishing to do that will have to seek Parliamentary approval after explaining the rationale for raising the tax.

However, the FM made it clear that the government had no plan now to trim personal income tax rates. Later this month, the finance ministry will fix the borrowing target for H2FY20. Any call on extra borrowings, if required, would be taken only later this fiscal, Sitharaman said.

The Budget had projected a fiscal deficit of 3.3% in FY20 and pegged the government’s gross market borrowing at Rs 7.1 lakh crore. Experts say, after the tax cuts, the deficit could worsen by about 50 basis points to 3.8%, even after factoring in the extra RBI dividend of Rs 58,000 crore, if everything else goes as planned.

The finance minister said the government would focus on 23 CCEA-approved firms for disinvestment this fiscal and expressed optimism that Air India will be fully divested. The Air India Specific Alternative Mechanism will likely meet soon to finalise broad contours of the sell-off.

Sitharaman will soon meet top private bankers to ensure that private banks, too, join their public-sector banks in enhancing the flow of credit. The FM met chiefs of state-run banks on September 19. However, the minister rejected the notion that the Congress-era loan melas were back, clarifying the government hadn’t asked the banks to throw due diligence to the winds but merely directed them to ease the flow of liquidity. The FM had asked public-sector banks to hold meetings with NBFCs and borrowers in 400 districts by next month.

The minister said a detailed analysis of the direct tax code report was on and decisions on the panel’s recommendations would be taken in due course.

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