Big smile and two thumbs up: Industry's response to govt's $20-bn bonanza

India cut tax on local businesses to one of the lowest rates in Asia, while providing a more than $20 billion boost to revive economic growth from a six-year low.

Tax on all domestic companies will be lowered to 22% from a base rate of 30% currently, Finance Minister Nirmala Sitharaman said Friday. The effective new rate will be 25.2% including all additional levies and is applicable only for companies.

The new tax structure is effective from April 1, 2019. New companies formed from Oct. 1 will attract a base tax rate of 15% and effective rate of 17.01%, she said. That brings it to the same level as in Singapore.

The reduction in corporate tax rates follows a series of steps to boost demand and investments after growth slowed to 5% in the quarter ended June. The move puts India’s tax rate on par with Asian peers and will boost efforts to attract investments as companies look for alternative destinations to sidestep supply chain disruptions from the U.S.-China trade war.

“These are massive steps to make India competitive,” said Amit Maheshwari, a partner at Gurgaon-based Ashok Maheshwary & Associates LLP, a tax consultancy firm. “This will help attract significant FDI and manufacturing to India.”

The step will promote growth and investment, Sitharaman said, adding that the latest measure will cost the government 1.45 trillion rupees ($20.5 billion) in revenue.

The government had estimated tax revenue of 16.5 trillion rupees in the year to March. “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.

India’s equity benchmark, the S&P BSE Sensex, jumped as much as 5.3%, the most intraday since May 2014 and the rupee rallied after the announcement, while sovereign bonds slumped as fiscal concerns came sharply back to the fore.

The yield on the benchmark 10-year bond was up 15 basis points to 6.79%, erasing previous losses accrued after the central bank chief said there was scope for more easing.

Reserve Bank of India Governor Shaktikanta Das welcomed the government announcement, calling it a “bold move.”

Prime Minister Narendra Modi has been under pressure from industry groups and political opponents to use the fiscal space afforded to him last month by a more than $24 billion windfall from the RBI.

“The unexpected fiscal stimulus is positive for sentiment,” Priyanka Kishore, head of India and south east Asia economics at Oxford Economics, Singapore. “Investors will watch closely on how the potential damage to the budget deficit is managed.”