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Corporation tax is a direct tax imposed on the net income or profit that enterprises make from their businesses. Companies, both public and privately registered in India under the Companies Act 1956, are liable to pay corporation tax. This tax is levied at a specific rate according to the provisions of the Income Tax Act, 1961.
In a major move, Finance Minister Nirmala Sitharaman in September 2019 announced sharp cuts in the corporation tax among a series of announcements. The government decided to slash domestic corporate tax to an effective 25.17 per cent, inclusive of all surcharges and cess, in a bid to promote growth and investments amid an economic slowdown. The move would cost the exchequer Rs 1.45 trillion.
The government proposed to reduce the corporate tax rate from the existing 30-25 per cent (depending on the turnover thresholds) to 22 per cent (effective rate 25.17 per cent, including surcharge and cess) for all the domestic companies, subject to them not availing of a specified list of exemptions. These include, among others, exemptions available to units in special economic zones, deductions for certain scientific research expenditure, additional depreciation available on fresh investments and the losses, if any, attributable to such deductions.
The minimum alternate tax (MAT), introduced to facilitate the taxation of zero-tax companies, will also not be applicable to companies availing of the reduced rate of taxation.
Companies claiming exemptions could continue to avail of them and pay taxes at pre-amended rates, that is, 25-30 per cent. They might opt to pay taxes at lower rates at a future date. However, the option to pay taxes at the reduced rate of 22 per cent, once selected could not be changed. Significantly, where the companies continue to avail of exemptions, the MAT rate has been reduced from 18.5 per cent to 15 per cent.
Any new domestic manufacturing company, incorporated on or after October 1, 2019, is to be allowed to pay corporation tax at the rate of 15% (effective rate 17.01%). No MAT is to be imposed on these companies either.
Enhanced surcharge will not apply to capital gains on sale of any securities, including derivatives, in the hands of Foreign Portfolio Investors (FPIs).
The finance minister also announced an expansion in the scope of corporate-social responsibility (CSR) activities. The companies can now spend 2% of the money on state or Union govt incubators, PSUs, state universities, IITs, public-funded entities.