Options get limited when so many Indians are cheats.

"On 20 September, finance minister Nirmala Sitharaman announced that the government had decided to cut the corporate tax to 22% (effective rate of 25.17% including cess and surcharge) for existing firms and to 15% (effective rate 17.01%) for new domestic firms in the manufacturing sector," wrote V Kaul. "The government said this was being done to promote growth and investment." Tax cuts will certainly increase net profits of firms by the amount equaling the reduction in tax but how will it increase cash flow, which reflects true earnings of a company, or of EBITDA, which is earning before interest, tax, depreciation and amortization. Because they depend on total sales and, "India is currently going through a major collapse in consumer demand." Tax cuts will definitely increase earnings per share but whether they stimulate growth depends on how companies use the money, wrote H Jethmalani. "Some options are: De-leveraging of balance sheets, price cuts/ higher promotions to spur demand, higher payouts to shareholders through dividends and higher capex spending." Many companies are sitting on excess capacity and so will wait for demand to improve. Those companies that avail of the lower tax rate have to give up all of their exemptions and incentives, which allowed them to carry their losses forward for 8 years, and once they do that they cannot return back to the old system. Share prices soared on the announcement but it is unlikely to lead to a revival of "animal spirits" unless the broader economy improves. Very few Indians invest in stocks, either directly by buying shares of individual companies, or indirectly through mutual funds. Indian stocks are very expensive already. "On a one-year forward price-to-earnings basis, the MSCI India index is currently trading at 18 times" which is "higher than the MSCI Asia Ex Japan's multiple of 13 times". The tax cut was touted as a Rs 1.45 trillion stimulus for the economy but "Crisil believes that the top 1,000 firms will see savings of Rs 37,000." "To earn Sitharaman's tax benefit , companies must give up their current tax exemptions and other fiscal incentives -- freebies that are estimated to account for over Rs 1 trillion," wrote O Goswami. So the net stimulus is Rs 0.45 trillion or 0.2% of GDP. Since inflation is low the interest rate needs to be cut as well, wrote Iyer and Jethmalani. However, if the government is forced to borrow more it will raise bond yields and keep lending rates high. A cut in personal income tax will certainly increase spending and lead to higher demand. Politicians are convinced that there are millions of very rich Indians who are cheating on income tax so they do not want to be seen to be lenient. That limits their options.