Corporate Rate Cut Could Push Fiscal Deficit To 3.7%

The reduction in corporate tax rates is unlikely to materially impact the credit profile of Indian corporates, although the risk of fiscal slippage is likely to increase significantly and the fiscal deficit may be pushed to 3.7 per cent, Fitch Group’s India Ratings and Research has said.

Analysing the top 1,000 listed corporates by revenue, it found out that the total quantum of reduction in tax liability in FY20 is likely to range between Rs 600 billion and Rs 650 billion, of which 50 to 60 per cent of the benefit was likely to accrue to corporates with relatively healthy credit profile marked by low leverage and comfortable interest coverage.

However, on the other hand, the impact on fiscal deficit, it said, was going to be significant.

“Government has budgeted fiscal deficit at Rs 7.04 billion for FY20, which is 3.3 per cent of gross domestic product (GDP). The announcement to slash the corporate tax rate to 22 per cent for domestic companies and 15 per cent for new domestic manufacturing companies and other fiscal reliefs is expected to hit the exchequer to the tune of Rs 1.45 trillion,” it said.

It added that the announcement would certainly push the fiscal deficit higher and taking into account the Rs 580 billion (net addition to the exchequer) due to the surplus transferred by the Reserve Bank of India and keeping other conditions the same, the fiscal deficit could increase to 3.7 per cent of GDP.

“However, this is based on the assumption that the nominal rate of growth in FY20 would be 11.0 per cent. Given the 1QFY20 nominal GDP growth slipping to 8 per cent, achieving an 11 per cent nominal GDP growth in FY20 appears to be difficult,” Ind-Ra said.

However, it also added that the fiscal deficit could be lower than 3.7 per cent as lower rates often result in better compliance, leading to higher tax collection. Also, reduction in corporate tax has been a longstanding demand of the corporate sector, which could lead to a significant change in business sentiments, and in turn could result in expansion in business activities and investment, thus helping government garner higher taxes.