In one of its biggest and boldest booster dose to a slowing down economy and reverse the pessimism in India Inc, the Narendra Modi government announced a cut in corporate taxes hoping to kickstart stalled private investment and fuel growth. Less than three months after the Union Budget, Finance Minister Nirmala Sitharaman announced a massive £14.5 billion tax bonanza that will see the tax rate come down to 22% (effective 25.17% with cess and surcharge) from 29.5% for companies that do not seek exemptions, and to 15% (effective 17%) for manufacturing start-ups. This will not be the last as more measures to reduce red tape and attract investment are on the anvil. At present, the tax rate for companies with annual sales of over £40 million is 30 per cent (exclusive of surcharge and cess) and 25 per cent for those with a turnover below £40 million.
This move, along with 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 £14.5 billion 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. Besides, Sitharaman sought to “stabilise the flow of funds into capital markets” and announced removal of the additional 20% tax on listed companies that had announced buyback before July 5, when the provision was announced as part of the budget proposals. 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.
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. “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.
“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. “The announcements in the last few weeks clearly demonstrate that our government is doing everything 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 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.
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 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.
