Published: Fri, September 20, 2019
Global News | By Blake Casey

India Surprises With $20 Billion Tax Cut Stimulus; Stocks Soar

India Surprises With $20 Billion Tax Cut Stimulus; Stocks Soar

The Reserve Bank of India (RBI) - reportedly under government pressure - has cut interest rates four times this year to a nine-year low, while New Delhi has also announced the merger of 10 state banks to try to ease pressure on lenders.

As the corporate tax rate has now been brought at par with many emerging economies and countries in South East Asia, industry captains hope it will make the Indian economy globally competitive. The effective tax rates would now be 25.17 per cent, from the near 30 per cent.

Meaning, effective tax rate for new manufacturing companies will be 17.01 per cent inclusive of all surcharge and cess.

"We want to have more investments and "Make-in-India", which itself means a lot more investment, a lot more employment generation, a lot more economic activity", Finance Minister Nirmala Sitharaman said on Friday.

The tax cuts are the latest measures to boost spending and shore up investment in India.

However, the boom in economic activity that the government expects to generate with the tax cuts should deliver greater revenue, she said.

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Tax experts say this can really put the country on the global manufacturing map as manufacturing hubs like China operate at similar tax rates.

In another relief, the minister said listed companies which have announced buyback of shares prior to July 5, will not be charged with super rich tax.

The biggest booster dose of the Modi 2.0 government is expected to give a major push to the sagging economy which clocked a 6-year low growth of 5 per cent in the April-June quarter of FY20. If corporates are going to benefit 5 per cent, by way of corporate tax cuts, earnings are going to improve by 5 per cent and this is what led to the rally in the markets of 5 per cent. Markets are likely to continue to rally in the coming days, though investors may need to remain tired at higher levels.

India has been seeking to boost its tepid manufacturing sector through its "Make in India" campaign.

However, sector wise there have been no benefits and the reduction in corporate tax, means companies benefit across the board. The effective rate, including all additional levies, will be 25.2% and applicable on companies that aren't availing any incentives or exemptions.

Announcing the rate cuts following the GST Council meeting here, Finance Minister Nirmala Sitharaman said, "Hotels room with tariff of Rs 7,500 crore would now attract 18 per cent GST from 28 per cent earlier". "We are conscious of the impact all this will have on our fiscal deficit", said Sitharaman, who's targeted to narrow budget gap to 3.3% of gross domestic product this year. "Also, it's a move towards simpler low tax regime with no or minimal incentives exemptions (which are misused more than used)", said Nirmal Jain, Chairman, IIFL Group. HDFC Bank Ltd. provided the biggest boost to the Sensex. Bond yields have already surged on worries that the fiscal deficit would widen sharply.

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