Finance Ministry Cuts Down Corporate Tax

  • On 20th September, 2019, the government slashed the corporate tax rate for companies by almost 10 percentage points to 25.17 percent and offered a lower rate to 17.01 per cent for new manufacturing firms.
  • For this the government brought in the Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance Act 2019.
  • The decision came a day after the announcement of a scheme for generous disbursal of loans to farmers, retail borrowers and micro, small and medium enterprises (MSMEs)

Aim

  • This step aims to boost economic growth rate by boosting investment by the private sector after economic growth slowed to a six-year low in the April-June quarter of financial year.

Objective

  • To turn India into an investor’s favourite by restoring investor’s confidence and boost sentiments and demand.

Need for Lowering Corporate Tax

  • India’s gross domestic product (GDP) growth slowed for the fifth consecutive quarter in April-June 2019 to 5 percent, the lowest in six years. This was on the back of faltering domestic demand, with both private consumption and investment proving lackluster.

Key Highlights

  • Corporate tax rate has been slashed to 22 percent for domestic companies not availing any incentives/ exemptions; earlier rate 30 per cent.
  • Effective tax rate for such companies now stands at 25.17 percent including cess and surcharge; earlier it was 34.94 percent. Also, such companies shall not be required to pay Minimum Alternate Tax (MAT).
  • New domestic companies incorporated on or after Oct 1, 2019, making fresh investment in manufacturing can pay income-tax at a rate of 15 percent; earlier rate was 25 percent.
  • For companies who continue to avail exemptions/incentives, the rate of minimum alternate tax (MAT) has been reduced from 18.5 percent to 15 percent.
  • There will be no tax on buyback of shares by listed companies that have announced buyback plans before July 5, 2019.
  • Scope of corporate social responsibility (CSR) activities has been expanded. The mandatory 2 percent CSR spending to include government, Public Sector Undertaking (PSU) incubators and public-funded education entities.
  • Revenue foregone for reduction in corporate tax and other relief is estimated at Rs. 1.45 lakh crore.

Source: Times of India

Corporate Tax around the Globe

  • The new rates bring India closer to the rates prevalent in many of the emerging and industrialised countries.
  • The new corporate income tax rates in India will be lower than USA (27 percent), Japan (30.62 percent), Brazil (34 percent), Germany (30 percent) and is similar to China (25 percent) and Korea (25 percent).

Source: Times of India

Impact

  • Pushing Economic Growth: India’s reduction in the corporate may result in a virtuous cycle of increasing investments, consumption leading to economic growth and company profits. The will result in massive release of Rs. 1,45,000 crore immediately in the economy which will in turn boost sentiments and bring in real surplus to corporates across the country.
  • Alter the Profitability Dynamics: The move will likely alter the profitability dynamic of the Indian corporate ecosystem. For one, given the substantially lower rates would imply that many corporates will break even much ahead than what would have been the case with the earlier rates.
  • Raising Capital Expenditure of Companies: It will encourage companies to invest more, thereby, raising their capital expenditure (capex). This will be particularly true for those who have the funds, but have remained non-committal on deploying investible money in adding new capacity lines, which will eventually, through a secondary round effect, prompt these companies to hire more employees.
  • Benefits to Consumer Market: Consumer goods will be one of the biggest beneficiaries of the tax cut. Fast moving consumer goods (FMCG) are likely to fall after the slash in tax.
  • Cleaning Existing Taxation Maze: It will also help to clean up the existing taxation maze, which is full of exemptions, surcharges and cesses. Existing companies that decide to do without the benefit of exemptions can get away by paying 22% corporation tax, with the effective rate working out to 25.17%.
  • Pathway to RCEP Trade Deal Signing: The aggregate corporation tax rates are now lower than China, Japan, South Korean and Malaysia which could give the government more space to look to sign the Regional Comprehensive Economic Partnership (RCEP) deal between 16 Asian nations, including India.

Way Forward

  • This is a big respite and would give the required stimulus to the economy which will  help create an environment of surplus in the hands of corporates for making further investments.
  • The reduction in corporation tax rates will not only lead to economic buoyancy but will also make Indian industry more competitive globally. Beyond the immediate benefit of an investment incentive for the manufacturing sector, these steps will also lead to a paradigm shift in the mindset.
  • It will give a great stimulus to Make in India initiative, attract private investment from across the globe creating more jobs, leading to the economic growth. Over all, this is a great step towards making India the $5-trillion economy.

Source : Civil Services Chronicle Online, September, 2019