Corporate Tax Cuts: Disinvestments To Help Bridge Fiscal Deficit, Says HDFC’s Deepak Parekh
India’s profit-making companies should pass on the benefits of corporate tax cuts to their consumers, a move that would help them increase their sales, HDFC Chairman Deepak Parekh said Thursday.
He also dismissed concerns on impact of corporate tax cuts on India’s fiscal deficit, saying that a strong disinvestment pipeline, starting with the Air India privatisation, should help bridge the fiscal gap.
Tax on local companies will be cut to 22 percent from 30 percent if they don’t avail exemptions or incentives from the current financial year, Finance Minister Nirmala Sitharaman told reporters in Goa on Friday.
The corporate tax cut would cost the government Rs 1.45 lakh crore, Sitharaman said, adding that it would have to revise its corporate tax target of Rs 7.66 lakh crore. But economic buoyancy will generate revenue to make up for the loss, she said, referring to the impact on the fiscal deficit target of 3.3 percent for 2019-20.
"Our tax rates have become very competitive now and the government's move to lower corporate tax rates should help the country attract manufacturing units which we were losing to countries like Vietnam, Cambodia, Thailand, Indonesia and the Philippines," Parekh told the Press Trust of India in an interview.
"We were losing manufacturing units in sectors like textiles to these countries and fresh investments can now come to India with lower tax rates," he said.
The government's move has been taken well by foreign investors as well, Parekh said.
"The sentiments and confidence level have got a big boost. Profitable companies can pass on part of benefits to consumers by reducing product prices. The companies can reduce their margins a little bit, so that their sales pick up.
"If a company wants to be competitive in the market and if it wants to sell its product more, it should share the tax cut benefits by lowering the product prices," he said.
He said the reduction of Goods and Services Tax rates on hotels and catering, etc., would also give these sectors a boost.
According to Moody's Investors Service Inc., the corporate tax cut is credit positive for companies, but it is credit negative for the sovereign, as it aggravates mounting risks for the government in meeting its fiscal deficit target.
But Parekh sees the government’s disinvestment plans as bridging the gap between expenditure and revenue, as the Union Cabinet has already given its approval for stake sale in seven-to-eight central public sector enterprises.
Expecting Air India to be sold first, Parekh said a part of the national carrier's debt has already been transferred to another company to make its sale viable.
"Air India may be the first company to be sold to private sector. Similarly, there would be other PSUs," the HDFC chairman said, sounding confident that the airline would definitely get sold despite failure in previous attempts at privatisation.
"Disinvestment should take care of concerns on the fiscal deficit side. All of these may not happen in this fiscal, but six months is a long time and 3-4 companies can get sold and generate necessary funds for the government," he said.
Asked whether steps were needed to give a push on the demand side too by lowering personal income tax rates, Parekh said, "I think it would be difficult to bring down the rates for individuals as the tax for higher earning people has been just increased."
"What the government has done is a much neater way of doing it," he said.