India to Reduce Corporate Income Tax Rate to 25 Percent

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India’s Finance Minister, Arun Jaitley, has announced a reduction in corporate tax rates from 30 percent to 25 percent. The lower rate, designed to attract Foreign Direct Investment (FDI), places the Indian rate at the same level of China and is expected to be active from the fiscal year 2016-17. This means it will take effect from April 1 2016.

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The phasing in of the new rate has yet to be announced; however, Jaitley stated “the reduction in corporate tax rate will boost investor confidence and encourage companies to continue the process of job creation and overall growth.”

The move brings India into closer pricing competition with China, especially given that Indian labor costs remain on average 20 percent of that in China. Offset by this, however, are productivity levels, and detailed examinations need to be undertaken prior to examining financial and production capabilities between the two countries to fully understand the overall investment risk and reward. Generally speaking, however, if Indian labor can reach within 65 percent of China’s productivity ratios, India tends to become the more viable option.

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Rohit Kapur, Country Manager for Dezan Shira & Associates in India, said “We will have to wait and see when this is actually implemented, as the impact on Indian MNC’s as the Government are reducing tax on one hand yet discontinuing incentives on the other may meet resistance. However, it is expected to be beneficial to foreign investors as the ability for them to reach a lower effective tax rate is likely to be enhanced by this move”.  

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