India corporate tax cut aims to boost economic growth

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Profits made by Indian companies will now be taxed at a rate of 22%, down from 30%, as long as they don’t apply for other incentives or exemptions, Finance Minister Nirmala Sitharaman announced on Friday. New manufacturing firms incorporated after October this year will be taxed at 15% instead of 25%, as long as they start production before March 2023, she added.

The announcement sent Indian stock markets surging, with the country’s benchmark index, the Sensex, up more than 5% by Friday afternoon. India’s currency, the rupee, also rose around 0.5% against the US dollar.

The tax cuts will result in a 1.45 trillion rupee ($20.4 billion) drop in government revenues every year, according to Sitharaman.

“The idea is [that] economic buoyancy will itself generate enough reasons for better revenue generation,” she said.

The tax cuts are the latest in a series of moves by the government to try and boost India’s economic growth, which has been falling for more than a year and dropped to a six-year low of 5% in the quarter ended June. Major industries like automobiles and consumer goods are struggling, and hundreds of thousands of workers have been laid off in recent months.
The government has also eased rules on foreign investment and relaxed regulations that prevented companies like Apple (AAPL) from opening stores in India.

Sitharaman said boosting India’s manufacturing will mean “a lot more investment, a lot more employment generation [and] a lot more economic activity” in the long run.

Analysts say the tax cuts will help.

“The fiscal steps by the Indian government are likely to re-energize investor interest,” Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, said in a research note. India still has big problems like a banking sector saddled with a huge pile of bad debt “but this is most definitely a step in the right direction,” he added.

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