This is one promise that the current government will be hard-pressed to keep. In Budget 2015, Finance Minister Arun Jaitley had proposed to cut the corporate tax rate to 25% over a four year period, bringing it closer to Asia's average corporate tax of 21.91% at the time. "The basic rate of corporate tax in India at 30% is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive," he had said in his budget speech, significantly adding that the effective collection of corporate tax is about 23%.
While India Inc. has waited for this roadmap with baited breath ever since, Jaitley's last full-fledged budget presentation before general elections next year is unlikely to bring cheer.
To begin with there is Prime Minister Narendra Modi's casual remark to Indian CEOs in Davos recently, when he quipped "All of you seem pleased with me at the moment, but let us see what you say after the budget is presented."
Far more concrete evidence is India's fiscal deficit, which is expected to breach the target of 3.2 percent of GDP in the current financial year for the first time in five years. "Within the context of weak economic growth, we believe Jaitley faces a difficult balance in supporting growth without compromising significantly fiscal prudence (which could feed into higher inflation and potentially higher interest rates)," Goldman Sachs said in a pre-budget note.
Already, rising inflation, tightening cash conditions, and worries about a less fiscally prudent government have sparked a sharp sell-off in India's bond markets. A budget that significantly expands the deficit in the next fiscal year could spark a further sell-off, leading to a continued rise in bond yields that could raise borrowing costs at a time when the government is seeking to stimulate growth. This explains why the government may be unwilling to risk further widening the fiscal deficit by reducing corporate tax.
Three other factors at play suggest looming disappointment for the corporate sector. To begin with, despite the recent uptick, GST revenue collections remain under pressure. Then, the government is widely expected to prioritise spending for the agriculture sector this year, leaving little room to also make India Inc. happy. Last but not the least, with opposition leader Rahul Gandhi vociferously accusing Modi of crony capitalism in the Gujarat Elections last year, the government might not want to lend credence to that line of though by cutting corporate tax at this crucial juncture.
But there is no denying the fact that doing nothing might hurt India. As a Bloomberg report points out, Modi needs to keep investment going to help support an economy that's set to expand at its slowest pace in four years. And to woo foreign investors at a time when the likes of US, UK and Japan countries are lowering business taxes, India needs to follow suit.
"The U.S. has made corporate tax rates competitive and India needs to respond," Jayesh Sanghvi, a tax partner at EY in Hyderabad told Bloomberg. If it doesn't, corporates will examine arbitrage opportunities given the 10-15 percentage point difference, he added. The clamour from overseas investors is certainly loud enough. "We have urged the government to reduce corporate tax, and a simpler and more predictable tax regime that encourages UK investments in India," said UKIBC chief operating officer Kevin McCole. The UK, incidentally, is the largest G20 investor in India, with around $24 billion invested in the country.
Reducing corporate taxes will also boost job creation. No wonder then that the India Inc. is still holding out hope. In a recent Deloitte survey, covering 120 professionals across sectors, 50% of the respondents expected corporate tax rate to be reduced. Ficci president Rashesh Shah, for one, would be happy even if the government tried to bring it down to 28% "to give confidence that they [the government] are on that path."
Sources in the finance ministry, however, say that the concessions in the offing might be limited to smaller businesses and the smaller taxpayers. Firms with an annual turnover of Rs 500 million or less are already charged 25% corporate tax instead of the standard 30% but there is a proposal to move businesses with greater turnover into the lower tax band too.
The last finance minister to tinker with the corporate tax rate was P. Chidambaram, who slashed the rate from 35% to 30% in 2005. India Inc has been waiting ever since to pop the bubbly.