The government today slashed corporate tax rate to 22 percent if exemptions are not availed. This gives companies an effective tax rate of 25.17 percent, inclusive of all surcharges and cess.
In an interaction with Moneycontrol, Deepak Parekh, Chairman, Housing Development Finance Corporation, spoke about how this could revive investments and market sentiment. Excerpts:
Q: How will the corporate tax cut help?
A: It will certainly help the high-tax paying companies. Tax rates come down. Money available for reinvestment and paying a better dividend will be there. You can plough back money and make the company stronger because only 25 percent goes in taxes. It is a great boon.
We want to come on par with other emerging economies where the tax rate is 15-25 percent. The finance minister has rightly said that if you put new investments it will only be 15 percent, which is a motivation for existing companies to start new ventures. It will also motivate manufacturing companies from abroad to come and set up ventures in India because they are used to paying 15-25 percent tax and not 35 percent.
This is an incentive to bring in more FDI. More manufacturing companies coming in will mean more jobs. It is a positive signal that we want to be on par with the other markets and do not want to overtax. We have also made FPI attractive and hence we reduced the surcharge.
Overall, India is making a conducive environment where more money can come in. Domestic companies can expand and foreign companies can come in.
Q: Will it provide a boost to consumption demand?
A: The sentiment has to improve and with measures like this, it will improve. It is a good beginning. They have introduced a new real estate fund. We could see an announcement on how this fund could operate.
Q: What more should be done?
A: The government is under pressure and it cannot afford to lose too much revenue. We have a fiscal deficit target of 3.3 percent this year and 3 percent next year. You can tweak it a little but cannot let 3.3 percent become 5 percent. There has to be some fiscal discipline. The finance minister is working within that discipline. They have an additional income from the RBI special dividend (one-time) of Rs 1.76 lakh crore.
This tax cut move will cost them Rs 1.45 lakh crore for the whole year. Some privatisation of Air India is being done with the government putting a part of the debt of the company into another company. It will make arrangements to auction Air India. We are moving in the right direction. The government is aware of the issues in the economy and is taking appropriate action.
Q: Do you expect any measures to revive the auto sector?
A: I expect that something may come in. But here, the NBFCs have to start lending again. I do not think that the auto companies can do anything. GST collections are lower than what the government had expected. So it is very difficult for them to just slash the GST rates. Revenue consideration is very important for the government.
Q: Is risk aversion coming down in the market?
A: We will have to see what the mood is now in the market.
Q: There are fears of fiscal deficit rising to 4 percent as against the 3.3 percent estimate? What is your take?
A: I do not think that it will rise to 4 percent but it may increase to say 3.6 percent. This is my estimate.