“To attract foreign capital for our development needs, I propose to reduce the corporate tax rate on foreign companies from 40 to 35 per cent,” Sitharaman said while announcing the Budget for this fiscal year.
The Budget has proposed to reduce the rate of tax chargeable on income of foreign company (other than that chargeable at special rates) from 40% to 35%.
With the tax reductions, the highest effective tax rate for foreign companies has been reduced from approximately 43.7% to around 38%, said Vinita Krishnan, Executive Director – Direct Tax, Khaitan & Co.
This reduction is especially advantageous for foreign companies with an established presence in India, such as bank branches and infrastructure companies with project offices in the country, Krishnan said. It also benefits those generating short-term capital gains from unlisted shares/securities, interest income, or other previously high-taxed income, regardless of any relief provided by the applicable tax treaty.
India attractive alternative for manufacturers
With global supply chains diversifying away from China, India is positioning itself, along with Southeast Asia, as an attractive alternative for manufacturers. The government aims to draw $110 billion in FDI annually over the next seven years, compared to an average of over $70 billion in the past five years.
The Budget also proposed to simplify rules and regulations for foreign direct investments to facilitate attracting more overseas money, nudge prioritisation, and promote opportunities for using Indian Rupee as a currency for overseas investments.Initiatives such as Make in India, the Industrial Corridor Development Program, Production Linked Incentives (PLI), the India Semiconductor Mission, and the National Logistics Policy have all contributed to India’s atractive story to pull foreign investors and set up stores here.
India’s increasing appeal as a manufacturing hub is evident, with numerous global companies strategically diversifying their production bases amid evolving geopolitical scenarios. Notably, various major players in electronics, automotive, and engineering sectors have unveiled substantial investment initiatives in India for upcoming manufacturing ventures.
Apple to VinFast comes to India
India has of late attracted a slew of foreign companies to either invest or announce such plans here ranging from Apple and Foxconn to VinFast and Stellantis as they want to tap the growth potential of the world’s most populous country that is seeing an income boom.
Foxconn for instance has been doubling down on investments and business partnerships in India, as it looks to diversify its supply chain operations outside of China.
Earlier this year, Foxconn Group’s Yuzhan Technology leased approximately 550,000 square feet of warehousing space in ESR’s Chennai Industrial Park for a 10-year term. This facility is one of the largest in India for manufacturing Apple products.
To be sure, the annual Economic Survey prepared by the economic affairs department, said on July 22 that even as India builds up itself as a potential alternative for global companies as a manufacturing destination, it may not be the most prudent approach to think that India can take up the slack from China vacating certain spaces in manufacturing given China’s dominance in global supply chains.
Nonetheless, a key part of the “Viksit Bharat” vision is unlocking the potential of the domestic manufacturing industry. The government has outlined an ambitious plan to establish India as a global manufacturing hub, which will create significant employment opportunities. Policies like Make in India and the Production Linked Incentive (PLI) scheme, along with increased transparency in regulatory processes to reduce the compliance burden on industries, support this vision.
The recent tax cut for foreign companies is expected to further propel this dream.
The tax cut for foreign companies also come after the Reserve Bank of India (RBI) had reported in June that net foreign direct investment (FDI) flows into the Asian nation had slumped 62% over the last fiscal year to the lowest since 2007.
India’s manufacturing sector is on the verge of a revival as the world increasingly adopts a China+1 strategy. Economists believe, to capitalise on this and develop India into a global manufacturing hub, the government must continue its comprehensive approach, which includes policy support through the PLI scheme, lower corporate tax rates, custom duty adjustments, and the expansion of enabling infrastructure.
What about the desi companies?
However, the Budget left the corporate tax rates on domestic firms unchanged once again at 22% (for companies forgoing all exemptions).
Lower corporate tax rates or business-friendly reforms have obviously been a persistent demand by companies that would drive investments and eventually create jobs and stimulate economic growth. However, slashing corporate tax rates would have dented the country’s tax coffers at a time when the government seeks to stay on fiscal glidepath to bring down the budget deficit to well below 4.5 per cent of the GDP by 2025-26.
Ahead of Lok Sabha elections in 2019, the Modi government in the interim budget had proposed to cut corporate tax for companies with annual turnover of up to Rs 400 crore to 25 per cent from 30 per cent.
Corporate tax, levied on the profits of companies operating within the country, is a major source of revenue and critical to help India meet its budget deficit target. The money is also channelised for funding government initiatives ranging from social sector and welfare schemes to infrastructure development.
However, offering attractive corporate tax rates, which the government had earlier claimed to be one of the lowest in the world and highly competitive, is crucial for the country which is seeking to replace China as a factory floor and advocates making in India for local and global consumers.
