Corporate tax cut positive but growth faces headwinds: Moody's
September 21, 2019 17:16
Moody's Investors Service on Saturday said the cut in corporate tax increases the government's fiscal risks while headwinds from cyclical factors such as rural stress, weak corporate sentiment and slow credit pose threat to near-term growth.
On Friday, the Centre announced a reduction in the base corporation tax rate to 22 per cent from 30 per cent as part of stimulus measures to revive slowing economic growth.
The rating agency said it does not expect the corporate tax rate cut to revive growth to the extent that stronger tax buoyancy compensates for the loss of revenue.
"While the reduction brings India's corporate tax rate closer to peers throughout Asia and will support the business environment and competitiveness, a host of cyclical factors, including rural financial stress, weak corporate sentiment, and a slow flow of credit in the financial sector, remain headwinds to near-term growth," it said.
Moody's said the cut in corporate tax is credit positive for companies because it will enable them to generate higher post-tax incomes. "However, it is credit negative for the sovereign, as it aggravates mounting risks for the government in meeting its fiscal deficit target."
Commodity and information technology (IT) services companies will benefit most from the tax rate cut.
"But the degree of strengthening in corporate credit profiles will depend on whether companies reinvest surplus earnings into their businesses, or use them to reduce debt or to boost shareholder returns," it said.
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