India slashed corporate tax rates for domestic companies to the lowest levels in the country’s history, spurring the biggest one-day jump in Bombay’s stock market index for a decade as New Delhi seeks to revive faltering economic growth that has tumbled to a six-year low.
On Friday morning, Nirmala Sitharaman, finance minister, announced that New Delhi would cut its basic corporate tax rate from 30 per cent to 22 per cent, meaning the effective corporate tax rate — including surcharges and cesses — will drop from 34.94 per cent to 25.17 per cent.
New manufacturing companies will be treated more favourably. Their basic tax rate will cut from 25 per cent to 15 per cent if they incorporate after October 1 and commence production by March 31 2023. The effective tax rate for companies fulfilling these criteria will be 17 per cent.
The BSE Sensex leapt about 5 per cent in early afternoon trading following the announcement.
Analysts said that the tax cuts — which Ms Sitharaman said will see the government forgo an estimated $20bn a year in revenues — will provide a major boost to struggling businesses in a move that New Delhi hopes will lead to a revival in private investment.
The business community was jubilant, hailing the move as a transformative step that would revive flagging confidence and animal spirits. “This is the best move ever,” Kiran Mazumdar-Shaw, chief executive and founder of Bangalore-based Biocon, told an Indian television channel. “This will kick-start the economy.”
Uday Kotak, chief executive of Kotak Mahindra Bank, called the cuts a “big bang reform” and a “a bold progressive step forward”.
In a tweet, he said the lower tax rate “allows Indian companies to compete with lower tax jurisdictions like the US. It signals that our government is committed to economic growth and supports legitimate tax-abiding companies.”
But even as equity markets rallied, investors sold off Indian bonds, causing yields to surge to 6.8 per cent amid concerns that the government would struggle to meet its fiscal deficit target of 3.3 per cent of gross domestic product.
Analysts said that the deficit was likely to rise to about 4 per cent of GDP, unless the government announced parallel spending cuts.
Indian businesses have long complained that the country’s onerous tax burden makes it tough for them to compete with companies based in other emerging markets.
Ms Sitharaman said that India’s corporate tax regime would now be “almost at par with many of the Asian and south-east Asian countries”.
India’s economic growth has slowed for five consecutive quarters, tumbling to just 5 per cent year on year in the April to June quarter, its lowest level in six years. Consumer spending growth has also slowed sharply, as incomes have failed to rise and private investment has been muted for years.
Despite Mr Modi’s landslide re-election victory in May, the business community had expressed gloom and disappointment with his administration’s record on economic management.