In its biggest booster dose to a slowing down economy, the Government Friday announced a cut in corporate taxes hoping this will kickstart stalled private investment and fuel growth. Less than three months after the Union Budget, Union Finance Minister Nirmala Sitharaman Friday announced cuts in tax rates for domestic companies to 22% and for new domestic manufacturing companies to 15%. At present, the tax rate for companies with annual sales over.
This move, alongside other measures such as relief on the Minimum Alternate Tax (MAT) payout, the surcharge on capital gains on sale of equity shares and on the tax incidence on share buy-backs, will cost the exchequer Rs 1.45 lakh crore annually and comes as part of a series of measures the government has announced after consultations with the industry to deal with the deepening slowdown.
“The step to cut corporate tax is historic. It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win-win for 130 crore Indians,” Prime Minister Narendra Modi said in a tweet as he left for the United States where he is scheduled to address a rally Sunday with US President Donald Trump and the UN General Assembly next week.
“The announcements in the last few weeks clearly demonstrate that our government is leaving no stone unturned to make India a better place to do business, improve opportunities for all sections of society and increase prosperity to make India a $5 trillion economy,” Modi said.
The reduction in corporate tax, effectively, brings India’s ‘headline’ corporate tax rate broadly at par with the average of 23 per cent rate in Asian countries, a move cheered by the stock markets that, at 5.32%, clocked their highest single-day gain in a decade closing at 38014. But analysts differ over the impact. Some raises questions over whether corporates choose to utilise the surplus earnings for reinvestment in business, debt reduction or high shareholder returns. Also, apart from the boost to business sentiment in the immediate term, the knock on impact on consumption demand is expected to be modest and the impact on fresh investment activity is, from most accounts, likely to be seen with a lag.
The new effective tax rate, inclusive of surcharge and cess, for domestic companies would be 25.17% and for new domestic manufacturing companies would be 17.01%. These rates would be applicable to companies that forego the current exemptions and incentives.
Also, MAT will not apply to such companies. For the firms that choose to continue with pre-amended tax rates, companies will see their MAT incidence come down to 15% from 18.5% currently. When asked about the impact of these tax rate cuts on the government’s fiscal targets, Sitharaman said, “Economic buoyancy will generate revenue.”
Bond prices, however, fell sharply in trading on concerns that the revenue foregone could make it difficult for the government to meet its fiscal deficit target of 3.3 per cent by March-end 2020, the windfall from the Reserve Bank of India notwithstanding.
Even as banks and auto companies gained the most on stock exchanges as they will see substantial reduction in their tax outgo each year, for a large number of entities, including some of the country’s biggest companies such as Reliance Industries, TCS, Infosys, Wipro, HCL Technologies and Mahindra & Mahindra, the cut in headline rates may only be an academic exercise as their tax outgo in FY’19 was already around 25 per cent on account of a clutch of exemptions and other set-offs currently available.
The government further announced a rollback back of the higher surcharge on capital gains on sale of equity shares announced in this Budget for individuals, HUFs, Association of Persons (trusts).
“We are now almost at par with many of the Asian and South East Asian countries in terms of corporate tax rates. Today, we are probably one of the lowest and at par with the lowest in South East Asian countries. The rate at which we are now going to tax is 22% for the existing companies. For the newer investments which are coming in and start manufacturing before 2023, 15% tax rate will be applied. In addition, surcharge and cess are added. The new tax rates are going to draw new investments and make companies who want to expand existing businesses, invest more,” Sitharaman said at a press briefing in Goa just before she headed into the meeting of the GST Council.
The reduction in corporate tax rate for domestic companies would be effective from April 1 this year, while the change for new domestic companies would apply for those which get incorporated on or after October 1, 2019 and start producing on or before March 31, 2023. These changes have been brought in through the Taxation Laws (Amendment) Ordinance 2019 amending the Income-tax Act 1961 and the Finance (No 2) Act 2019.
Former Finance Minister Arun Jaitley had announced a plan in 2015-16 to cut corporate tax rate from 30 per cent to 25 per cent in phases over a four-year time frame. The current year’s budget had reduced the tax rate for companies with turnover up to Rs 400 crore to 25 per cent.
At 22 per cent, India’s corporate tax rate will be lower than that in China, Indonesia, South Korea (25 per cent each), Malaysia (24 per cent), but higher than the rate in Vietnam (20 per cent), Thailand (20 per cent), Singapore (17 per cent).
“The slew of measures announced by the Finance Minister have come as a much needed gust of fresh air to resurrect and pump prime the economy. The bold and positive move to rationalize the corporate tax structure will help kick-start the next big economic upcycle. The measures clearly underline the resolute intent of the Government under the leadership of the Prime Minister to maintain India’s position as the hottest investment destination in the middle of adverse global developments and a slowing world economy,” said Sunil Bharti Mittal, Founder and Chairman, Bharti Enterprises.
The government also announced other changes to attract fund flows to the equity markets, while providing companies the flexibility in making their Corporate Social Responsibility (CSR) payments. In order to stabilise the flow of funds into the capital market, the government removed the enhanced surcharge on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, Hindu Undivided Family, Association of Persons and others.
The enhanced surcharge shall also not apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs). Since FPIs are the largest players in the derivatives market, this move will benefit them the most. Responding to these announcements, the benchmark Sensex at the Bombay Stock Exchange rose 1921 points or 5.32% to close at 38014.
This was the highest single-day gain for Sensex in a decade since its 18% jump on May 18, 2009. Banks and auto companies gained the most on stock exchanges as they will see substantial reduction in their tax outgo each year.
The finance minister said economic buoyancy created by these measures will improve government revenues. “We want more investments and Make in India, which itself means a lot more investment, employment generation and a lot more economic activity. As a result of which economy will give us more revenues,” Sitharaman said.
The government also provided flexibility to companies in spending their CSR payments on innovation and incubation proposals in key universities. “Now CSR 2% fund can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government, and, making contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs,” the finance ministry said.