“The move to cut corporate tax rates is a bold measure that will make India an attractive destination for foreign investors. As far as FDI (foreign direct investment) is concerned, I think India stands definitely in a very competitive position and should be able to attract higher investments,” said Shaktikanta Das, Governor, RBI. He made this comment just a few days ahead of the monetary policy meeting, which is going to start from October 1.
“India’s corporate tax now becomes very attractive as compared to other emerging market economies in ASEAN (Association of Southeast Asian Nations) and other parts of Asia," Das added.
In order to boost consumption and investment, Finance minister Nirmala Sitharaman on Friday lowered corporate tax rates, making the country one of the lowest tax regimes in Asia. The effective tax rate, including cess and surcharges, for existing companies comes down from 34.94 per cent to 25.17 per cent, while for new companies; it is reduced from 29.12 per cent to 17.01 per cent.
Apart from this, Sitharaman also announced a reduction in the rate of minimum alternate tax (MAT) from 18.5 to 15 per cent. According to Das, with a lower tax, domestic companies will be left with more cash. He further added, “So they will be able to undertake more capital expenditure and can invest more. Some of them can deleverage their liabilities, which will add strength to their balance sheets."
The governor said the meeting with the finance minister was a customary one ahead of a monetary policy meeting. “There is a long tradition that the governor meets the finance minister and discusses the overall macro-economic position. So today’s meeting was basically that," he said.
The three-day monetary policy committee meeting (MPC) will be held amid expectations of another rate cut announcement on October 4. In past few months, RBI has cut repo rate by 110 basis points. Repo rate is a rate at which central bank of a country RBI lends money to commercial banks.
Experts and analysts, however, expect RBI to be more cautious in cutting policy rates from now as the fiscal impact of the government’s big tax bonanza for the corporate sector could reduce revenue collections by 0.7 per cent of gross domestic product (GDP).
Now, what actions the RBI will take that is still a question. To find out the answer of this question we have to adopt wait and watch approach, till the RBI come up with its decision on October 4 after monetary policy meeting.