The Centre’s move on Friday to slash corporate tax rate ranks as another landmark reform step, after the implementation of GST and the bankruptcy code. It effectively corrects the Budget proposal, which restricted the corporate tax cut to companies below an annual turnover of ₹400 crore, by expanding it to all domestic companies — and goes a step or two further. The tax rate for all companies has been reduced from 30 per cent earlier to 22 per cent now; after including cess and surcharge, the effective tax rate is down from 34.94 per cent to 25.17 per cent. This rate holds if companies do not avail of exemptions. Along with exemptions, the new rate works out to 30.5 per cent for non-manufacturing entities and 27.8 per cent for manufacturing companies. The positive impact will be most perceived in the FMCG, capital goods and steel sectors. The minimum alternate tax, paid by zero tax companies, has been reduced from 18.5 per cent to 15 per cent. For manufacturing companies incorporated on or after October 1 this year, the tax rate is down to 15 per cent (25 per cent earlier), and after the cess and surcharge would amount to 17 per cent. This release of funds, equal to a ‘revenue foregone’ of ₹1.45 lakh crore, is expected to translate into significant investments, with buoyant markets aiding the process. Finally, India Inc’s tax rates are competitive with the best of the world. The way to go is to rationalise rates and weed out exemptions. Lower taxes and easier business conditions will lead to an improvement in compliance and collections. The tax administration must take the cue and step back, whether it is with respect to direct taxes or GST revenues.

While it is true that demand needs an urgent boost, it is here that the Centre’s moves give rise to concern. The intent to have loan melas will hobble the recovery of the banking sector, and lead to more fiscal giveaways that do not translate into long term asset creation. Instead of vitiating the credit culture, the Centre could have worked out an infrastructure (and social sector) spending programme, just as the fiscal stimulus unveiled in 2008-09 had done. Poorly conceived programmes can trigger inflation without necessarily improving potential output of the economy. Since the fiscal deficit is expected to touch 4 per cent, against the targeted 3.3 per cent, it is all the more important to ensure that the funds so released create the conditions for long-term growth, and eventually a reduction in the fiscal deficit as well.

Of concern, however, is the hardening of yields as a result of the anticipated rise in the fiscal deficit. The Reserve Bank would need to address this challenge, so that growth impulses now released do not hit a speed-breaker.