Budget 2018: Company tax cut falls short of narrowing gap with peers

India cut the corporate tax rate for some firms while excluding the biggest companies that contribute bulk of the collections, falling short of narrowing a gap with several other economies that have lowered the levy to attract investments.

The basic rate will be reduced to 25 per cent for companies with annual revenue of up to 2.5 billion rupees ($39 million) in the year starting April 1, Finance Minister Arun Jaitley said in his budget speech on Thursday. “This will leave them with higher investible surplus, which will create more jobs,” he said.

The proposal isn’t sufficient to narrow the gap with other Asian countries, which have an average rate of 21.3 per cent, and the reduction in the US levy to 21 per cent in December. While Japan has begun phasing in a cut in corporate taxes to get companies to spending their cash on boosting wages and investment, China will offer a tax exemption to foreign investors if they re-invest their dividends in projects encouraged by the government.

“These are half-measures at a time when governments globally, including Donald Trump, are slashing corporate taxes to lure investments,” said Bahroze Kamdin, a Mumbai-based partner at Deloitte India. The country’s biggest companies that contribute 87 percent of the corporate tax revenue will continue to pay at the higher rate, she said.

Prime Minister Narendra Modi’s government pledged in 2015 to bring down corporate taxes over four years to improve India’s investment climate. Those steps include cutting red-tape, spurring the liquidation of assets to speed-up the recovery of bad loans, and introduction of a national sales tax last year to lower business costs. Last year, the corporate tax was cut to 25 percent for firms with annual revenue of up to 500 million rupees.

India will face a budget shortfall of 3.5 percent, missing its previous goal of 3.2 per cent, for the year ending March 31, Jaitley said. The slipping fiscal deficit and focus on agriculture probably gives Jaitley “too little elbow room” in extending tax reliefs to more Indian companies, Kamdin said.

The step is “narrow in impact on the economy and business,” said Milind Kothari, managing partner at BDO India. “Still lot more to be done to increase India’s competitive advantage as the headline tax rates are falling all across the world.”