Finance Minister Nirmala Sitharaman's announcement included a number of major measures from the Government of India (GOI). Minister Sitharaman unveiled sweeping tax cuts, which will bring the effective tax rate from 35% to 25% for domestic companies, and lower the rate for new manufacturing firms from 29% to 17%.
This is a significant development in the Indian tax ecosystem and consistent with the trend in Asian economies as they compete with each other to attract companies looking for alternate manufacturing locations to address disruption to supply chain from the U.S. – China trade war. The tax cut will have a significant impact on India as both a destination for foreign direct investment (FDI) as well as domestic growth. That said, we are still cautious given many of the impediments to additional FDI entering the country are centered on the regulatory environment, speed of entry, inefficient infrastructure and not necessarily post-tax profit.
The immediate impact for U.S. owners of Indian subsidiaries:
- India becomes a more viable investment destination in Asia particularly for U.S. companies impacted by disruption to manufacturing due to U.S. – China trade war
- Reduction in corporate tax rates will lower global tax cost
- Because the lower tax rates are retroactive to April 1, 2019, U.S. companies preparing quarterly and annual tax provisions will need to consider impact of rate change on current tax expense as well as carrying value of deferred tax assets and liabilities