Budget 2018: Arun Jaitley may not follow US corporate tax cut, but Arvind Subramanian thinks India can't ignore it either

A day before Finance Minister Arun Jaitley is to present annual budget for 2018-19, Chief Economic Advisor Arvind Subramanian suggested that India will have to respond to the United States' corporate tax cut to remain a globally competitive market. He said India can't just sit and watch as other countries respond (to US tax reform) in kind.

Subramanian's response has come at a time when multiple reports are doing the rounds, arguing why the government may not in this budget go for corporate tax cut. However, the CEA feels that if other European countries follow the footprint of the US, India will have no other option but to follow suit.

In an interview to Mint, Subramanian said: "With the changing world in mind, we need to factor in as to how we should design our own tax policy. The government has already announced cutting corporate tax to 25%. The question is, should we look at some of these targets and numbers afresh."

Subramanian was referring to US President Donald Trump's tax reform which has put pressure on other countries to bring down taxes to attract investors. Trump earlier this month slashed corporate tax from 35 per cent to 21 per cent. He did this despite IMF chief Christine Lagarde's warning that bringing down taxes could destabilise world economy.  

Speaking on the US tax reform, German Chancellor Angela Merkel earlier this month said that Europe should not complain when other countries overhaul their tax systems but instead respond with reforms of its own. May be this is the reason the CEA thinks that India cannot afford to ignore possible tax changes.

Subramanian's observation is somewhat similar to noted economist Ruchir Sharma who in an interview to a business TV channel said that India would have to match the corporate tax rate with other countries in order to remain an attractive destination for global investment. Sharma had said that if the United States cuts its corporate tax and India doesn't do it, then it would create serious problem. "Why would you want to setup plant or factories here (India) or at least a US person would want to do it, if the corporate tax rate in the United States is going to be 15-20 per cent," Ruchir Sharma had said.

Ruchir's stand seemed to have vindicated as days after Donald Trump's rate cut, Apple and Exxon Mobil announced an investment of USD 350 billion and USD 50 billion respectively into US economy citing tax reforms.   

In 2015, the Finance Minister had promised to reduce corporate tax to 25 per cent over a four year period. In his Budget speech of 2015-16, Jaitley said that "a regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion. I therefore propose to reduce the rate of corporate tax from 30 per cent to 25 per cent over the next four years. This will lead to higher level of investment, higher growth and more jobs." Jaitley had admitted that "the basic rate of corporate tax in India at 30 per cent is higher than the rates prevalent in the other major Asian economies".

Ever since the Finance Minister made that announcement, India Inc and other corporate federations have been calling for readjustment in the current tax rates. Given the current scenario -rising inflation, fiscal deficit breach and declining GST revenue, it is highly unlikely that the government will go for tax cut.

Even business community is not expecting Jaitley to go for any radical tax cut. Ficci President Rashesh Shah earlier said that he was not expecting the Finance Minister to cut corporate tax rate to 25 per cent in view of fiscal constraints. However, the government should bring down the tax rate to 28 per cent at least to give a confidence that it is on that path, Shah said.

Earlier this week, Corporate America urged the Finance Minister for further reduction in tax uncertainty for multinational companies and institutional investors. US-India Business Council President Nisha Desai Biswal said: "A significant positive step toward improving the investment climate would be to further reduce tax uncertainty for multinational companies and institutional investors in India."