India's new lower corporate tax could boost its export sector
It sets up the foundation for the nation to achieve its ambitious aim of tripling its exports to $1 trillion in the next five years
Exports from India are expected to get a boost from the government’s surprise announcement to slash corporate tax rates, which will help increase the competitiveness of Indian companies globally. Lower taxes will bring them at par with some of the Asian competitors, analysts say.
The relief could not have come sooner for Indian companies struggling to maintain profitability under the weight of heavy corporate taxes, and sets up the foundation for the nation to achieve its ambitious aim of tripling its exports to $1 trillion (Dh3.67tn) in the next five years.
“It’s a prudent move to reduce the corporate tax rates because it moves India to parity with its regional peers, thereby, removing one of the biggest issues hampering manufacturing and exports,” says Suvodeep Rakshit, the senior economist at Kotak Institutional Equities in Mumbai.
The decision to lower tax rates will help advance Asia’s third-biggest economy. India’s gross domestic product growth slowed to more than a six-year low of 5 per cent in the April to June quarter, according to the latest government statistics, which alarmed businesses and investors alike.
In response, India’s Finance Minister Nirmala Sitharaman on Friday said that the government is cutting the basic corporate tax rate for domestic companies to 22 per cent from 30 per cent. For manufacturing companies, set up after October 1 of this year, the applicable taxation rates would be even lower at 15 per cent, down from the previous 25 per cent for new entities.
The stock markets in India rallied on the welcomed news. A cut in taxes was something business leaders have long been yearning for. While the Indian government has unveiled a series of measures in recent weeks to prop up the country’s flagging economy, the tax cut is seen as the boldest decision yet.
Despite everything what the government has done, economists are still questioning whether India will be able to meet its fiscal deficit target of 3.3 per cent for the current financial year.
Scepticism aside, being among the biggest beneficiaries of the latest stimulus package, India’s manufacturing and exports sectors can help step-up the economy and create much needed jobs to bring down unemployment levels.
“We are certain that this big bang reform will kick-start the economy,” says Ajay Piramal, the chairman of Piramal Group, a Mumbai-headquartered conglomerate, which has interests ranging from healthcare to packaging. Surplus funds available to companies can be invested in capital expenditure and talent acquisition. India can be “very competitive” on the back of the government’s tax initiative, he said.
Bringing costs down can help India grow its exports as it becomes a more attractive market for other countries to purchase goods from. In addition, the reduction in rates for new manufacturing companies is likely to encourage the set up of more businesses, which in turn could raise the number of goods flowing out of India as production activity increases.
Official figures show India’s exports reached $330 billion in the financial year to the end of March, a small fraction of $2.6tn of Chinese exports last year.
India, like other countries in the region, is looking to grow its share of exports by capitalising on the US-China trade war, as global companies look to find alternative markets not affected by the higher tariffs. This could be a major opportunity for Indian exporters, analysts say.
As global demand slowed, India’s exports contracted by 6.05 per cent in August to $26bn, according to data from the commerce ministry.
“Some contributors to this [slowdown in exports] are rising protectionism, sluggish global demand, lower industrial investments, trade tensions and risk aversion among businesses,” says Arvind Shivkumar, the head of sales and customer success at Vamaship, an Indian shipping solutions company. “This has had a direct impact – reduced manufacturing, temporary factory shutdowns, job losses, reduced credit flow” and an overall slowdown in Indian economy, he says.
With the intention of trying to address some of these very problems, Ms Sitharaman on Friday explained the provision for lower tax rates for new manufacturing companies is to accelerate the country’s “Make in India” initiative. This is a flagship campaign by the Prime Minister Narendra Modi-led government to try to transform India into a global manufacturing hub – which will not only produce more products for domestic consumption but also export more goods worldwide.
The corporate tax cuts are a timely announcement as Mr Modi arrived in the US on Saturday. He is due to address a “Howdy, Modi” rally in Houston, Texas, alongside US President Donald Trump today. The week-long visit is seen as an opportunity for India to improve its own strained trade relations with the world’s biggest economy and try to drum up US investment. In recent weeks, the government has also taken measures to improve India’s investment climate.
Earlier this month, Ms Sitharaman unveiled $7bn of export stimulus including a tax refund programme for exporters, due to come into effect on January 1. She also announced improved insurance coverage for banks that lend to the country’s exporters.
“It’s a new attractive scheme to refund the duties and taxes on exports,” says Milan Thakkar, the chief executive of Walplast, an Indian manufacturer and exporter of building material products. “It’s expected to start in early 2020 and we are eligible to take export related benefits.”
Some sectors may face headwinds despite the government initiatives, such as the gems and jewellery sector that suffered a steep drop in exports in August.
Yogesh Bansode, the president of BVC Brinks Global, a logistics company which focuses on handling diamond and jewellery trade from India, said Indian exports in the sector are primarily down “due to high gold prices and the rise in the US dollar”. The jewellery sector relies heavily on imports of raw material such as gold, for example, before the finished products are exported, which means input costs have gone up and are beyond their control.
The government may have taken actions to support exports, but there are external and international factors that could still influence how much of a boost the sector will eventually get.
“More broadly, forward-looking business surveys suggest that a swift recovery in world trade growth is unlikely anytime soon,” says Shilan Shah, the senior India economist at Capital Economics. “And structural constraints that have prevented the development of a strong manufacturing sector in India means that, for the time being, countries such as Vietnam and Malaysia are better placed to benefit from the shifting of production out of China.”
Right now, even the weakness of the currency rupee, which should make India’s products more attractive for foreign buyers, is not helping exports.
“The common perception is that devaluation in a currency means good times for exporters, because they end up selling more as their goods or services become cheaper in the international market,” says Pushkar Mukewar, the co-founder of Drip Capital, a trade finance company which focuses on developing markets. “However, factors like import dependencies, regulatory concerns, and geopolitical tensions can reduce the positive impact of a falling rupee to negligible levels for exporters.”
He adds “problems posed by trade wars, rising protectionism, and a slowing global economy” are some of the major worries for exporters.
Mr Mukewar says while the government measures are being welcomed, there remain significant risks on the horizon that are totally out of the authorities’ control.
Updated: September 22, 2019 03:45 PM