Why the corporate tax cuts will put pressure on FY 20 fiscal deficit

Further, to stabilise the flow of funds into the capital markets, the Ordinance provides that the enhanced surcharge of 25 percent and 37 percent which were levied in the Union Budget would not apply to capital gains income arising to several categories of taxpayers including individuals and foreign portfolio investments (FPI) from sale of any type of security. While the Government had already announced in August a rollback of this surcharge for FPIs on sale of equity shares, the leeway now extends to all types of securities including derivatives.

In the recent Budget, the Government had announced levy of buyback tax (approx. 23.3 percent) even on listed companies undertaking buyback of shares. Given that, the move was seen as an anti-abuse measure, it was made applicable prospectively but with immediate effect from July 5 2019. Considering this, a few listed companies aborted their planned buybacks even though groundwork for the same was done. The Ordinance now seeks to provide relief from buyback tax to those listed companies which had already made a public announcement of buyback before 5 July 2019. Consequently, it can be expected that some of these companies may now proceed with their planned buybacks.

The above tax concessions are expected to result in a loss to the exchequer of a massive Rs. 1.45 trillion. Coming on the back of subdued advance tax collection in the first two quarters, the rate cut indeed came as a surprise to many. Clearly, the resolve of the Government is to kick-start growth and the move is aimed at firing up both, consumption and investment, the two key engines of economic growth. It is interesting to note that with the reduced corporate tax rates across the board, and even lower tax rates for manufacturing companies, India is bound to be looked at as an attractive investment destination as compared to some of its peers like China and Vietnam.

On the flip side, this is bound to put some pressure on the Government’s FY 20 fiscal deficit target of 3.3 percent of GDP. Having said, the Reserve Bank of India had announced a transfer of surplus reserves of Rs. 1.76 trillion to the Government less than a month ago, which may come in handy in its overall math of fiscal deficit. With another Union Budget coming up in February 2020, the public at large would now be expecting a stable tax regime along with a simpler tax administration to back up the above policy initiative. All in all, this was a bold and unprecedented move from the Government clearly signaling that it will continue to push forward its growth manifesto for the good of the nation!