Cut in corporate tax rate was needed to spur investments, growth: CEA

Chief Economic Adviser Krishnamurthy Subramanian on Friday said the cut in corporate tax rate was required to boost investments as the virtual cycle that spurs growth in the economy has not been functioning as expected for the last few quarters.

“For us (India) to achieve the goal of $5 trillion economy by 2024-25, and $10 trillion by 2030, we need to press the paddle on structural reforms,” he said and explained the host of measures that the government has taken in recent times.

“Investment is important for enhancing productivity in the economy and it is productivity that eventually then improves wages, creates job, enhances exports and then the combination of all these gives the purchasing power in the hands of the consumers which is what manifests as demand.

“The anticipation of demand is what the companies use to make investments and that is how this virtual cycle goes. Over the last few quarters this virtual cycle is not moving as fast as it was when we were growing at 7 per cent plus...,” he said at the ‘India Economic Forum’ Skoch event here.

Explaining the tax dynamics for corporations, he said corporate tax is first paid by a company and whatever is left as capital gains or dividends, the individuals are then taxed later. “One of the important things to recognise is that there is double taxation... Which is why, we at the government went ahead and reduced the corporate tax rates,” Subramanian said.

The government has undertaken a number of measures to arrest growth slowdown. In September, it announced a cut in the corporate tax rate to 22 per cent from 30 per cent. It also lowered the tax rate for new manufacturing companies to 15 per cent to attract new foreign direct investments.

India’s economy grew at 5 per cent in the first quarter of 2019-20 — the slowest pace in over six years.

Subramanian said the current situation has provided the government an opportunity to try and bring in important structural reforms.

“I am confident that these important structural reforms that we have undertaken will definitely have an impact on investment and thereby on the other parts of the cycle,” the CEA said.