FM reduces foreign corporate tax rate to 35 percent.
The cut in the tax rate for foreign companies from 40 percent to 35 percent, along with the abolition of the 2 percent equalisation levy, came as a surprise, according to Deloitte India Partner Rohinton Sidhwa. This unexpected move is expected to make India a more attractive destination for foreign investment by reducing the tax burden on international businesses operating in the country. The decision aligns with the government’s broader strategy to stimulate economic growth and competitiveness, potentially leading to increased foreign direct investment and enhanced economic activity within India.
New Delhi: Finance Minister Nirmala Sitharaman on Tuesday announced a significant reduction in the corporate tax rate for foreign companies, lowering it from 40 percent to 35 percent in an effort to attract increased foreign capital flow to India. This move was part of the proposals laid out in the Budget for 2024-25, which aims to make the country a more attractive destination for foreign investment.
In her Budget speech, Sitharaman emphasized the importance of foreign capital for India’s development needs. percent to 35 percent,” she stated. This reduction applies to the income of foreign companies that is not chargeable at special rates, marking a strategic shift in India’s tax policy to enhance its competitiveness in the global market.
The pre-budget Economic Survey, presented on Monday, provided a strong rationale for seeking foreign direct investments (FDI) from various global sources, including China, to boost local manufacturing and tap into the export market, despite the strained political relations with Beijing. The Survey argued that as the US and European markets are diversifying their immediate sourcing away from China, it would be more advantageous for Chinese companies to invest in India and subsequently export products to these markets, rather than India importing goods directly from China. This strategy is seen as a way to capitalize on the shifting dynamics of global trade and manufacturing.
In addition to the tax rate reduction, the government also announced the abolition of the 2 percent equalization levy, which was a tax imposed on digital transactions. This levy had been a point of contention among foreign companies operating in India, particularly those in the digital and tech sectors. The removal of this levy was unexpected and has been welcomed by industry experts and foreign businesses alike.
Deloitte India Partner Rohinton Sidhwa commented on the surprise move, noting that the cut in the tax rate for foreign companies from 40 percent to 35 percent, along with the abolition of the 2 percent equalization levy, was an unexpected but positive development. Sidhwa indicated that these measures would be replaced with alternative levies in the run-up to implementing the international tax framework known as Pillar 1 and Pillar 2 obligations. These obligations are part of the global tax reform initiative spearheaded by the Organisation for Economic Co-operation and Development (OECD) to address issues of base erosion and profit shifting (BEPS) by multinational enterprises.
The reduction in the corporate tax rate is anticipated to spur foreign direct investment (FDI) into India, providing a much-needed boost to the country’s economic growth. Lowering the tax burden on foreign companies is expected to make India a more favorable investment destination, encouraging multinational corporations to set up operations, expand their existing footprint, and invest in local industries.
The move aligns with the Indian government’s broader strategy to create a more business-friendly environment and attract foreign investment. It also complements other initiatives aimed at improving the ease of doing business in India, such as simplifying regulatory processes, enhancing infrastructure, and promoting innovation and entrepreneurship.
Foreign companies, especially those in sectors such as manufacturing, technology, and services, are likely to benefit from the reduced tax rate. This could lead to increased job creation, technology transfer, and economic development. The government’s decision to cut the corporate tax rate and abolish the equalization levy is expected to strengthen India’s position as a key player in the global economic landscape.
The Economic Survey’s recommendation to attract FDI from China, despite the political tensions, underscores the pragmatic approach adopted by the Indian government. By encouraging Chinese investments in local manufacturing, India aims to leverage its strategic location and skilled workforce to become a manufacturing hub for exports to Western markets. This approach is seen as a way to balance geopolitical considerations with economic imperatives, ensuring that India remains competitive in the global supply chain.
Furthermore, the shift away from the equalization levy is part of India’s commitment to aligning with global tax norms. The implementation of Pillar 1 and Pillar 2 obligations under the OECD’s BEPS framework is expected to provide a more equitable tax environment, addressing concerns about tax avoidance by multinational corporations. These obligations aim to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.
The government’s proactive measures to reduce the corporate tax rate and abolish the equalization levy are expected to have a positive impact on the business climate in India. By creating a more attractive and predictable tax regime, the government aims to foster a conducive environment for foreign investment, driving economic growth and development.
In conclusion, Finance Minister Nirmala Sitharaman’s announcement of a reduction in the corporate tax rate for foreign companies from 40 percent to 35 percent, coupled with the abolition of the 2 percent equalization levy, represents a strategic move to attract foreign investment and boost India’s economic growth. These measures, supported by the recommendations of the Economic Survey, highlight the government’s commitment to creating a business-friendly environment and aligning with global tax norms. As India continues to implement these reforms, it is poised to strengthen its position as a key destination for foreign investment and a hub for global manufacturing and trade.