In a bid to give the sluggish economy a shot in the arm, the government on Friday (September 20) slashed the income tax rate for companies by almost 10 percentage points to 25.17 per cent and offered a lower rate to 17.01 per cent for new manufacturing firms to boost economic growth rate from a six-year low by incentivising investments to help create jobs.
Union finance minister Nirmala Sitharaman said the reduction in tax rates has been done by promulgating an ordinance to an amendment to the Income Tax Act.
“In order to promote growth and investment, a new provision has been inserted in the Income Tax Act, with effect from financial year 2020. It will allow any domestic company an option to pay income tax at 22 per cent subject to the condition that they will not avail any exemption or incentives,” she told reporters here.
After considering surcharges and cess, the effective tax rate will be 25.17 per cent. This compares to 30 per cent corporate tax rate currently, and an effective tax rate of 34.94 per cent.
“To attract fresh investment in manufacturing and boost ‘Make In India’, new provision has been inserted in the I-T Act, which allows any new domestic company incorporated on or after October 1, 2019, making fresh investment in manufacturing, and starts operations before March 31, 2023, an option to pay income tax at 15 per cent,” she said.
The effective rate for new companies would come to 17.01 per cent after considering surcharges and cess subject to the condition that they do not avail any other tax incentive or concession such as tax holidays enjoyed by units in special economic zones (SEZ) or accelerated depreciation. This compares to the current base rate of 25 per cent for new companies and an effective tax rate of 29.12 per cent.
- Companies needn’t pay Minimum Alternate Tax (MAT)
- I-T rate for new domestic companies incorporated on or after Oct 1, 2019, slashed to 15% from 25%
- But, lower tax is applicable if companies do not avail any exemption/incentive, and commence production by March 31, 2023
- Their effective tax rate will be 17.01% inclusive of surcharge and cess; earlier the rate was 29.12%
- These companies, too, will not be required to pay MAT
- For firms which continue to avail exemptions/incentives, the MAT has been reduced from 18.5% to 15%
- Enhanced super-rich tax on capital gains on sale of share in hands has been removed
- Enhanced surcharge will also not apply to capital gains on sale of security in hands of foreign portfolio investors (FPIs)
- Enhanced surcharge introduced in Budget shall not apply on capital gain arising on sale of equity shares in a Co liable for Securities Transaction Tax (STT)
- No tax on buyback of shares if companies have made announcement regarding it before July 5, 2019
- Scope of corporate social responsibility activities has been expanded
- Lower tax rates are effective from April 1, 2019
- Changes in I-T Act, 1961 and Finance Act, 2019 made through an ordinance
- Revenue foregone for reduction in corporate tax and other relief is estimated at ₹1.45L cr.
Also, the companies will not have to pay minimum alternate tax (MAT). She said any company which do not opt for concessional tax regime and avails tax exemptions or incentives shall continue to pay tax at pre-amended rates.
“These companies can opt for concessional tax regime after the expiry of tax holiday or exemption,” she said.
To provide relief to companies which continue to avail exemptions and incentives, rate of MAT has been reduced from existing 18.5 per cent to 15 per cent. Also, the super-rich tax introduced in Sitharaman’s maiden budget on July 5 by way of a higher surcharge on income, shall not apply on capital gains arising on sale of equity shares in a company or business that is liable to pay securities transaction tax (STT).
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, she said. To provide relief to listed companies which have already made a public announcement of buyback of shares before July 5, 2019, tax on such buyback shall not be charged.
The tax cut will cost the exchequer ₹1.45 lakh crore annually. Sitharaman, however, sidestepped questions on the impact the concessions will have on the fiscal deficit target, saying that the government was conscious of the reality and will reconcile numbers. With her maiden budget seemingly failing to address issues facing the economy and doing little to bolster growth that has slowed to a six-year low and check unemployment that has risen to a 45-year high, Sitharaman has over the past one month announced measures in three tranches for different sectors of the economy including automobiles, banks and real estate.
India’s gross domestic product (GDP) growth slowed for the fifth consecutive quarter in April-June 2019 to 5 per cent, the lowest in six years. This was on the back of faltering domestic demand, with both private consumption and investment proving lackluster.
In response, her initial policy measures included support for the automobile sector, reduction in capital gains tax, and additional liquidity support for shadow banks. Accompanying structural reforms included a further easing of the foreign direct investment regime and consolidation of the public banking sector. In the third part, last Saturday (September 14), she announced a stressed asset fund to finance unfinished real estate projects and measures to boost exports.
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. https://t.co/4yNwqyzImE
— Narendra Modi (@narendramodi) September 20, 2019
Congratulations to PM @NarendraModi ji & FM @NSitharaman for the pathbreaking announcement done to cut corporate taxes for domestic & new manufacturing companies which will boost ‘Make in India’, promote Investment & will create huge employment opportunities.
— Piyush Goyal (@PiyushGoyal) September 20, 2019
Amazing what PM is ready to do for a stock market bump during his #HowdyIndianEconomy jamboree.
At + 1.4 Lakh Crore Rs. the Houston event is the world's most expensive event, ever!
But, no event can hide the reality of the economic mess “HowdyModi” has driven India into.
— Rahul Gandhi (@RahulGandhi) September 20, 2019
Corporate Tax Rate Cut From 30% To 25.2% To Spur Growth- this is a great move which will firmly revive growth n investment. My hats off to FM @nsitharaman for this bold but most needed move. https://t.co/yhvJ9IcMmm
— Kiran Mazumdar Shaw (@kiranshaw) September 20, 2019
The tax reliefs announced by FM Ms @nsitharaman will certainly prove to be a much-needed booster dose in tackling the current slowdown & regaining the growth momentum. Lowering of income tax on corporates is a longstanding FICCI request: Mr Sandip Somany, President, @ficci_india. pic.twitter.com/r5VFvlG0r5
— FICCI (@ficci_india) September 20, 2019
This is HUGE!!
— Shobha Karandlaje (@ShobhaBJP) September 20, 2019
Reducing corporate tax rate to 25% is big bang reform. Allows Indian companies to compete with lower tax jurisdictions like the U.S. It signals that our government is committed to economic growth and supports legitimate tax abiding companies.A bold, progressive step forward.
— Uday Kotak (@udaykotak) September 20, 2019
This is a positive development. I think timing is perfect. We have finally achieved 25% corporate tax rate which we always wanted.
– Paresh Parikh (Ernest and Young)
A headline-itis afflicted, panic-stricken Modi Sarkar has cut corporate tax rates less than 3 months after a Budget and 4 months before the next one. This is welcome but it is doubtful whether investment will revive. This does nothing to dispel fear that pervades in India Inc.
— Jairam Ramesh (@Jairam_Ramesh) September 20, 2019
Looks like Diwali has come early.
— Pawan K Goenka (@GoenkaPk) September 20, 2019
NSitharaman press conLIVEGovt to forego Rs 1.45 lakh cr/year on reduction in corp tax, others
— Mohandas Pai (@TVMohandasPai) September 20, 2019
— Amitabh Kant (@amitabhk87) September 20, 2019
Ashok Maheshwary & Associates LLP Partner Amit Maheshwari said “lately we have been loosing a lot of investments to other Asian countries who had been consistently reducing their corporate tax rate. This will help attract significant FDI and manufacturing to India. Abolition of DDT and going back to classical way of taxing dividends would be an icing on the cake”.
CII President Vikram Kirloskar said “cut in corporate tax from 30 per cent to 22 per cent without exemptions has been a long standing demand of industry and is an unprecedented and bold move by the Government”.
According to Frank DSouza Partner and Leader Corporate and International Tax, PwC India, “the reduction in the corporate tax rate is a welcome move and makes India attractive for new investments. Also, the changes to CSR contributions and the relief on buy-back tax, will address past concerns and also help in channelling funds towards R&D initiatives”.
(with PTI inputs)