Boosting Private Investment

The budget 2019-20 has reduced the corporate tax rate (CTR) from 30 per cent to 25 per cent for all firms with a turnover of Rs 400 crore. This would cover about 99.3 per cent of all firms in India.

OECD Data on Corporate Tax across 100 Economies

• India has one of the highest corporate tax rates in the world and India also has the highest effective corporate tax rate (ECTR) which stands at 44 per cent as estimated by OECD.
• Argentina which has the second-highest ETR is 9 ppt (percentage points) lower than India, and France which stands third has 11 ppt lower ETR.
• The ETCR of China is 20 ppt lower than India at 23.6 per cent.

The ETCR included all taxes paid by corporates in different countries — for example, corporate tax, dividend tax, capital gains tax.

Competitiveness of Economies

In the era of globalisation, no country is an island. Competitiveness is affected by tax rates, interest rates, exchange rates, and labour costs. No wonder why China was attracting more investments than India.

Now gone are the days when countries could devalue their way to prosperity. The strategy accomplished by China for almost two decades is obsolete now. The western powers are up in arms now and any such attempts to gain competitiveness by the devaluation of the currency will perpetually lead to a trade war.

The other options available before the economies are mercantilism, reducing its cost of capital, making labour more competitive and making the industry more competitive.

How India is strategizing?

• The budget has taken the right step by agreeing for Sovereign bond borrowing.
• The inflation rates are being tackled by the RBI by a gradual lowering of policy rates.

Challenges before India

• Mercantilism which is aimed at maximizing the exports of a nation is a longer route and currently out of reach for short term in India.
• Exchange rate operations are no longer operational.
• Labour codes are too rigid and are too slow to change.
• Monetary policy is sluggish in its operation and impact.

Hence it is being advocated that only option for Indian policymakers is to cut tax rates to internationally competitive levels.