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Podcast Transcript :
Hi I am Arjun Parthasarathy speaking and this podcast is on “Global Corporate Tax Rate Cuts and India Budget 2017-18”
US President Donald Tump is just starting off a wave of cuts in corporate tax rates across the globe. President Trump has stated that he will cut corporate tax rates in the US and ease regulations in order to entice corporates to invest in the US to create jobs. US equity indices are trading at record highs in anticipation of tax rate cuts.
UK PM Theresa May is looking to cut corporate tax rates to negate Brexit effects on investments. EU countries are under pressure to cut corporate tax rates as they could become uncompetitive. Pressure is building in countries across the globe to cut corporate tax rates on worries that investments will go elsewhere to lower tax countries.
India FM Arun Jaitley, too would be following the corporate tax rate cut mantra going on globally as he is set to present the Union Budget 2017-18 to the parliament on the 1st of February 2017. The whole Make in India campaign of PM Modi could come unstuck if India becomes uncompetitive on tax rates.
Cut in corporate tax rates is highly positive for equity markets as corporate earnings rise, which could lead to higher dividend payouts or higher investment for future growth. The rally in global equity markets to record highs is part due to the expectations of corporate tax rate cuts.
On the other hand, governments could face fiscal constraints as revenues fall from lower taxes. However, higher corporate investments and more wealth created in the economy would lead to higher economic growth that would lead to higher taxes. Hence in the short term, corporate tax rate cuts is negative for bond markets as governments would have to borrow more to fund fiscal deficits. In the longer term, as economic growth picks up, fiscal deficit will fall and bonds would benefit from lower government borrowing.
What can we expect from Budget 2017-18 on the corporate tax front? Corporate tax rates are likely to be cut, which has been the stated aim of the FM. Demonetization has hurt corporate revenues in the 3rd quarter of fiscal 2016-17 and could carry on into the 4th quarter as well. FM Arun Jaitley is likely to cut corporate tax rates in the budget both to compensate for demonetization and for expected cuts in US tax rates.
The government to compensate for loss of revenues on corporate tax rate cut could move away from FRBM fiscal deficit target of 3% of GDP for fiscal 2017-18 and could fix fiscal deficit at 3.3% to 3.5% of GDP. Bond yields would rise in the short term on higher fiscal deficit numbers while Sensex & Nifty would rally on lower corporate tax rates.
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