"The new rates simplify the tax architecture and it will give a fillip to investments and jobs", he told Reuters.
The government's growth support measures, announced in fits and starts over the last one month, supplement the RBI's generous dose of monetary stimulus.
The government had estimated tax revenue of 16.5 trillion rupees in the year to March, and may now possibly revive plans for the nation's maiden foreign currency sovereign bond sale.
The Finance Minister said that ordinance for cutting tax rate has been passed and corporate tax rate will be 22 percent without exemptions, adding effective corporate tax rate after surcharge will be 25.17 percent. A measure of banking stocks climbed 7 per cent, the most in six years, boosted by private sector lenders ICICI Bank and HDFC Bank. The high corporate tax rate meant that Indian companies were not competitive and this move helps address this and shall also boost FDI.
In order to stabilise the flow of funds into the capital market, the government has said that the enhanced surcharge introduced by the Finance (No.2) Act, 2019 will not apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax.
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"We are conscious of the impact all this will have on our fiscal deficit", she said, without elaborating. However, that does little to assuage market fears, as the government has broken the shackles and gone ahead and is spending.
Gopichand Hinduja, Co-Chairman of Hinduja Group said the current reduction in corporate tax was needed for the revival of the Indian economy and manufacturing sector. The yield on 10-year bonds surged 20 basis points, the most for the benchmark notes since February 2017, to 6.85 per cent.
The sharp tax rate cut has been announced even as revenue collection on account of both direct and indirect taxes are far below expectations. Remember, margins of corporates have been badly squeezed. If demand continues to remain subdued, for example in auto, the gains by way of corporate tax may do little to benefit these companies.
The most important thing is that corporates must go out and spend. On the Nifty 50, Zee Entertainment was the only stock that was down, while the top gainers were Eicher Motors, UltraTech Cement, Maruti Suzuki, Indiabulls Housing Finance and HDFC Bank. The RBI is now expected to back the government's present move with an interest rate cut next month.