[GTO]

As an entrepreneur & businessman, I am only too happy .

One more advantage of a lower company tax rate = lesser incentive to indulge in black money among small businessmen. Many Gujarati & Marwari businessmen from Mumbai have decided to lessen their unofficial transactions, now that the tax rate has been made so reasonable!

[imidnightmare]

Originally Posted by GTO

As an entrepreneur & businessman, I am only too happy .

One more advantage of a lower company tax rate = lesser incentive to indulge in black money among small businessmen. Many Gujarati & Marwari businessmen from Mumbai have decided to lessen their unofficial transactions, now that the tax rate has been made so reasonable!

Personally, I feel this is not going to be as big on the official-unofficial thing as a reduction in personal rates would be. Still, all steps on tax reduction are welcome. We need to reduce Corporate Taxation to ~20% and peak personal income tax to a max of 25%. These steps would be phenomenal.

Issue is that in a Left-leaning country, they're political suicide. Most commoners will happily buy into the Opposition / media / Left-libber narrative of a "suit-boot ki sarkar" which is pandering to the elite. Most Indians have an insane and illogical dislike (sometimes bordering on a pathological dislike) to the word "capitalism".

Oh well, I live in perpetual hope that someday our government will indeed do the right thing. The capitalist thing. Till then, we are destined to continue to pay the price for the Leftist foundation our founding fathers left us with.

[Santoshbhat]

Game changing move by the Govt. no doubt for the long term. Took everyone by surprise as no one was expecting this bonanza. Hopefully some more measures are in the pipeline to boost demand in the near term. I am pretty sure the disparity in personal tax rates and corporate tax rates won't stay this high for long

Just hope future budgets and Govts. don't tinker with it and reverse it back . All hopes are now on GST collections picking up from next year in order to maintain the fiscal balance. I believe the new GST return forms which kick in from next year will help plug the leaks.

[Annibaddh]

Originally Posted by SmartCat

Pawan Goenka on CNBC TV18:

- A typical automobile company in India with revenues of Rs. 100 has a PBT of Rs. 8.
- We pay around 30% of PBT as tax. So tax outgo will Rs. 2.4
- Because of tax cut, we will now be paying 25% of PBT as tax.
- New tax outgo will be Rs. 2
- Hence, there is not much scope for reduction in prices. Max reduction in price will only be 0.4%.
- Instead of price cuts, manufacturers might offer bigger festive discounts.

Slightly off. The effective cut is roughly 10% (35% incld cess to 25% incld cess) of PBT or 0.8% of revenue for automobile (give or take). However, input costs for the auto sector will also go down, as their suppliers will also benefit from this cut. And while you and I have no influence over pricing, Auto majors typically have strict pricing conditions with their manufacturers with predetermined margins. All in all a net impact of ~2% then.

[SmartCat]

Originally Posted by Annibaddh

Slightly off. The effective cut is roughly 10% (35% incld cess to 25% incld cess) of PBT or 0.8% of revenue for automobile (give or take).

Are you questioning MD of Mahindra & Mahindra Pawan Goenka's math?

Rajiv Bajaj of Bajaj Auto was called in next, and he concurred with Pawan Goenka's estimated numbers.

[nakul0888]

Tax cuts are well and good, if they are backed by spending cuts. Remember for a fiscally sound economy the deficits and national debt should be kept in check. I would argue both of them should be zero. So far we have not heard any big news about deregulation, disinvestment and cutting down the size of the government. Sadly this means we are just kicking the can down the road. It means we are simply going to borrow the shortfall caused by corporate tax cuts and go deeper and deeper into debt. This debt has to be paid back in the future with interest and would end up becoming an even bigger headache than what's going on today.

With regards to the auto sector, how many car companies in India actually make a decent profit here? I'm guessing not a lot. Tax cuts are effective only when there are any profits to be held back. Makes no difference to companies already deep in red ink.

[Annibaddh]

Originally Posted by SmartCat

Are you questioning MD of Mahindra & Mahindra Pawan Goenka's math?

Rajiv Bajaj of Bajaj Auto was called in next, and he concurred with Pawan Goenka's estimated numbers.

I considered that when I was putting in that quote. However, industry's comments, can't really be blamed for rounding-down can they ? Particularly in an environment when they are fishing for sops in the face of an epic downturn, and with a government desperate for impact, listening closely. If you round off one-way, these numbers (0.4) would be spot on, technically. There's a reason, God lies in details .

A better indicator of the impact is NIFTY auto index, up 12% (6928 to 7775 at the time of writing this) since Friday. For an SOP worth 5% of PAT (not even built-in for perpetuity), this is a 2.5x rise. Even providing for sentiment and potential spurred demand beefing up P&Ls, this is high. I doubt even that potential increased demand is reflecting in this. The markets will dial-up further if news of resurgence in auto comes.

[volkman10]

Corporate Tax - How India stacks up with its neighbours?




If you are relating to car price cuts, it may not happen!

Car price cut: Maruti says 'looking into the issue', Toyota, Honda, Hyundai say 'no'

Link

[imidnightmare]

Originally Posted by nakul0888

Tax cuts are well and good, if they are backed by spending cuts. Remember for a fiscally sound economy the deficits and national debt should be kept in check. I would argue both of them should be zero. So far we have not heard any big news about deregulation, disinvestment and cutting down the size of the government...

I'm a capitalist to the hilt and respectfully disagree with this. There are circumstances and circumstances and the decisions made have to reflect this. Note also that surplus economies / zero-debt / zero-deficit economies are figments of imagination for the most part. While fiscal prudence is a lovely concept, economic well-being is paramount.

Now, the first thing is "why not have a deficit"? Well, the reasons for this are that sustained deficits lead ultimately to higher rates and higher inflation levels. But, in times of low inflation and demand issues, the logic changes. At this time, a spur is needed - and that spur comes from fiscal policies and government spending. This is the crux of Keynesian economics and where Kenynes and Friedman have some differences (I'm a Keynesian).

India today has a very low inflation level - which could well fall further if demand doesn't pick up. That's actually unhealthy for a growing economy like ours and specially so in an economy with such an (unhealthy) high number of people dependent on agriculture. As such, the risk of inflation is low.

Secondly, interest rates. Interest rates are very high in India - and this inhibits business investment, decreasing attractiveness given that hurdle rates for projects rise to unhealthy levels. So, the risk to interest rates is also low given that the gap between them and inflation is already high to an unhealthy level.

Finally comes the point of how to fund the gap. Debt? Or quantitative easing? I'd argue that QE is the best option. It's been the best option for a while now. We've had a sustained period of low inflation and now, with demand falling, QE will not overheat the economy.

All the European economies followed your prudent rationale - and are still in a gigantic mess. The US went back to Keynes and QE (though possibly they didn't do enough of it) and they recovered first and best, despite having been worst affected. Bottomline? QE works in this situation. It's the best option. It's unpopular and deeply divisive and the Leftists hate it, but the fact remains that it works

Edit: You also miss out on the fact that all empirical evidence shows that lower tax rates lead to higher compliance and higher overall collections over time. Effect may not be immediate, but the higher investment and higher compliance create better collections - since collections are important only in value and not percentage terms.

[Enobarbus]

Originally Posted by imidnightmare

Finally comes the point of how to fund the gap. Debt? Or quantitative easing? I'd argue that QE is the best option. [/i]

The government doesn't need either. The total deficit from this rate cut is about 1.45 Lakh Crores. The RBI transferred 1.76 lakh crore from surplus reserve to the government (or going to transfer).
I agree with all who think that dipping into the reserve funds is fraught with risk. Had the government used those funds for QE, it would have been better than direct rate cuts.

I think the government has not done enough to improve the purchase power of the consumer. The way I see it, this rate cut might help the corporate sector in the short term, but unless they sell more, they are still not out of the red.
And they can sell more only if the consumer can buy more.

[libranof1987]

"Wait for a couple of days", says the Maruti Chairman on possible discounts given the corporate tax cut.

"It [slash in prices] is not something I can announce here... wait a couple of days and you'll have the answer," he said at the event in Mumbai.

https://www.businesstoday.in/current...ry/380529.html

[imidnightmare]

Originally Posted by Enobarbus

The government doesn't need either. The total deficit from this rate cut is about 1.45 Lakh Crores. The RBI transferred 1.76 lakh crore from surplus reserve to the government (or going to transfer).
I agree with all who think that dipping into the reserve funds is fraught with risk. Had the government used those funds for QE, it would have been better than direct rate cuts.

I think the government has not done enough to improve the purchase power of the consumer. The way I see it, this rate cut might help the corporate sector in the short term, but unless they sell more, they are still not out of the red.
And they can sell more only if the consumer can buy more.

RBI transfer was more about the off balance sheet issues. The fact is there is a twin balance sheet and the numbers we see don't communicate everything. Anyway, without getting into that part, I disagree on this being purely about corporate benefits for existing players; that is short-term alone. A tax cut dramatically changes the economics of business. By altering those, governments target increased spends - which in turn lead to more job creation and, on the supply side, more output.

On the demand side, by spurring inflow by investors, you create more employment and therefore, hopefully, more demand. Like I said, a reduction in IT rates will obviously be good too. Personal IT rates for middle and higher income groups are way too high.

Note: Government using reserves for QE is not possible. QE implies fresh money - which doesn't already exist. We'd normally see the results of this in the form of higher deficits without increased debt - with RBI funding financial institutions by buying their debt without any money changing hands and without altering reserves position. RBI transfer to government only reduces deficit.

[Enobarbus]

Originally Posted by imidnightmare

Note: Government using reserves for QE is not possible. QE implies fresh money - which doesn't already exist. We'd normally see the results of this in the form of higher deficits without increased debt - with RBI funding financial institutions by buying their debt without any money changing hands and without altering reserves position. RBI transfer to government only reduces deficit.

What I meant was instead of dipping into the surplus, the government should have let the RBI invest in bonds and other instruments to ease the liquidity situation in the market.
Whatever may be the issues, the way I see it, withdrawing from the RBI surplus and immediately granting tax benefit to the corporate sector amounts to a direct pay out.

[ashokrajagopal]

Originally Posted by imidnightmare

Note: Government using reserves for QE is not possible. QE implies fresh money - which doesn't already exist. We'd normally see the results of this in the form of higher deficits without increased debt - with RBI funding financial institutions by buying their debt without any money changing hands and without altering reserves position. RBI transfer to government only reduces deficit.

Well, isn't that how the US really landed with Trump, who now brought out the tariff tool in creating a slowdown ?
With low inflation in the system, the first aspect of credit fuelled consumption could go either way -- individuals/enterprises can put off loans because inflation is not going to eat away your risk. With the gig economy making future looking uncertain, how much would easy money(read low interest rates) make people go for credit ? I mean credit for more productivity or something for the future rather than servicing your earlier deficit.

[imidnightmare]

Originally Posted by Enobarbus

What I meant was instead of dipping into the surplus, the government should have let the RBI invest in bonds and other instruments to ease the liquidity situation in the market.
Whatever may be the issues, the way I see it, withdrawing from the RBI surplus and immediately granting tax benefit to the corporate sector amounts to a direct pay out.

That would be a government-funded bailout. Not QE. Anyway, the two decisions aren't linked. The Corporate Tax cut is something every right-thinking person has been asking for. Our tax rate is still higher than neighbouring countries - and this is without adding the DDT and buyback taxes etc. So, this was indeed essential. The RBI surplus bolsters the government's Balance Sheet - which is more about infra and welfare spending without deficits. These two aren't correlated as the tax cut has a completely different set of implications - and also impacts different financial periods.

Originally Posted by ashokrajagopal

Well, isn't that how the US really landed with Trump, who now brought out the tariff tool in creating a slowdown ?
With low inflation in the system, the first aspect of credit fuelled consumption could go either way -- individuals/enterprises can put off loans because inflation is not going to eat away your risk. With the gig economy making future looking uncertain, how much would easy money(read low interest rates) make people go for credit ? I mean credit for more productivity or something for the future rather than servicing your earlier deficit.

1. No. QE and lower taxes didn't land the US with Trump. If anything, Trump was brought in because policies stayed more "fiscally prudent" and "liberal" than they should have been.
2. Trump has actually been very good for the US economy. All jokes apart, and he is a despicable human being, he's actually benefited the US in terms of growth. His reign has seen higher economic growth than any recent terms. The lowest quarterly growth rate under him is 1% with most quarters breaching 2% and several breaching 2.5% and even 3%. For the US, that is tremendous.
3. More credit for productivity etc. are great in theory and in more developed and transparent economies. Won't work here.
4. Easy money does make people go for it. Proven fact. With the right checks in place, you avoid bubbles - but drive consumption. It's the only proven way to do so sustainably, specially in a situation like the one India faces right now.