As India slashes corporate tax, US evidence may come in handy

By Subhadip Sircar

India’s decision to cut corporate taxes may benefit from lessons learned in the United States.

A recent study suggests that the rise in US business investment since the passage of the Tax Cuts and Jobs Act in late 2017 isn’t necessarily due to the cut in the corporate tax rate from 35 per cent to 21 per cent, which aimed to lower the cost of capital. The paper published by the International Monetary Fund puts forth a simpler reason: investment has been rising because domestic demand was boosted by lower personal taxes and higher government spending.

India hasn’t decided on cuts to personal taxes, Finance Minister Nirmala Sitharaman said at a briefing on Sunday. She is betting that local firms will pass on the corporate tax cuts to customers in the form of lower prices to stimulate demand.

While certain types of firms, such as consumer goods makers, might do so, the bulk of listed companies are already sitting on manufacturing slack and would prefer to reduce debt rather than build factories or hire more workers, Neelkanth Mishra, India strategist at Credit Suisse Group AG, told BloombergQuint. Indian firms won’t necessarily use the tax cuts to return cash to shareholders -- unlike their US peers -- but fresh investments could take time, according to A. Vaidheesh, managing director at GlaxoSmithKline Plc’s Indian unit.

“The current slowdown cycle is different from the 2012-13 slowdown as the consumption demand is also significantly constrained,” said Madhavi Arora, an economist at Edelweiss Securities. “Therefore a broader tax cut covering all economic agents would have probably yielded better economic returns.”