Will Sitharaman's tax tweak snare capital fleeing China over US trade war?

While markets saluted Finance Minister Nirmala Sitharaman's sweeping reforms of the corporate tax rates on Friday, the best is yet to come, according to experts. The tax rates have become competitive when compared to most other South Asian and even Southeast Asian investment destinations, reports say.

A competitive environment should help India trap some of the capital fleeing China fearing a worsening of the US-China trade war and imposition of stiffer sanctions on Beijing. The tariff war touched off by US President Donald Trump has only worsened with Chinese President Xi Jinping in no mood to relent. India is eyeing a major share of the capital moving out of China to boost Prime Minister Narendra Modi's Make in India initiative, reports say.

India's effective rate of 25.17 percent compares well against China's 25 percent. The new rates will make India a good bargain when compared to Pakistan's 31 percent, Sri Lanka's 28 percent, and even Bangladesh's 25 percent. Among the Southeast Asian economies, India can easily steal a march over the Philippines, which has a 30 percent rate and Indonesia and South Korea who maintain a 25 percent rate and Malaysia with 24 percent. Thailand and Vietnam offer 20 percent rates, but India could score in terms of technically skilled labor and better infrastructure. Only Taiwan and Singapore with 17 percent rates still have a clear advantage over India.

The Finance Ministry in consultation with the Ministry of Commerce has been evolving a strategy to compete with South Asian neighbors like Bangladesh, which have attracted investors because of the cheaper labor and more conducive land acquisition laws. Indian officials think the country's reforms will enhance its ease of doing business rating and make it capable of taking on even Southeast Asian competitors. Vietnam, which is drawing a lot of investment fleeing Mainland China, has been on the Indian crosshairs for some time.

Sitharaman slashed corporate tax rate to 22 percent from 30 percent for domestic companies – and proposed a competitive 15 percent rate for new investment in manufacturing. The cumulative fiscal boost emanating from the tax law changes would amount to Rs 1.45 lakh crore, which sends a strong signal of the government resolve to revive economic growth, a report on The Economic Times website said. To be eligible for the new concessional tax rates, companies need to forego existing incentives and exemptions in force, the report said. Even those opting for the status quo, the minimum alternate tax (MAT) shrinks to 15 percent from 18.5 percent. Companies will have the option of lower tax rate after the expiry of tax holidays and concessions that they enjoy now. Once they choose the new tax rate, they can't revert to the concessional regime.

Prime Minister Modi bound for the US to address the historic 'Howdy Modi!' event along with President Trump termed the step to cut corporate tax rate "historic", saying it "will give a great stimulus to Make in India, attract private investment from across the globe and help create more jobs."