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What corporate tax cut means for the Indian economy (Relevant for GS Prelims & Mains Paper III; Economics)

What is the new tax rate?
Finance Minister Nirmala Sitharaman announced a significant cut in corporate tax rates, thus bringing down the effective tax rate (including various cesses and surcharges) on corporations from 35% to 25%. Also under the new corporate tax policy, new companies that set up manufacturing facilities in India starting in October and commence production before the end of March, 2023 will be taxed at an effective rate of 17%.

This will bring India’s tax rates on par with its competing Asian peers. Following the government’s decision, both the Nifty and the Sensex rose over 5%, which is their biggest one-day rise in a decade.

Why is the government cutting taxes?
The corporate tax cut is part of a series of steps taken by the government to tackle the slowdown in economic growth, which has dropped for five consecutive quarters to 5% in the June quarter.

The most immediate reason behind the tax cut may be the displeasure that various corporate houses have shown against the government’s policies.

What impact will it have on the economy?

  1. Tax cuts, by putting more money in the hands of the private sector, can offer people more incentive to produce and contribute to the economy. Thus the present tax cut can help the wider economy grow.
  1. The corporate tax rate, it is worth noting, is also a major determinant of how investors allocate capital across various economies. So there is constant pressure on governments across the world to offer the lowest tax rates in order to attract investors.
  1. The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
  1. The tax cut, however, is expected to cause a yearly revenue loss of ₹1.45 lakh crore to the government which is struggling to meet its fiscal deficit target.
  1. At the same time, if it manages to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue.

Source: The Hindu



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