Diwali comes early for companies as FM offers tax cuts to lift up economy

Nirmala Sitharaman
Union Finance Minister Nirmala Sitharaman on Friday went a step further to announce steeper corporation tax rate cuts than were proposed earlier even as these would hit the exchequer by Rs 1.45 trillion a year amid a shaky revenue position of the Centre.

The measures are expected to boost investment and manufacturing under the Make in India initiative.

The measures, announced on the day Prime Minister Narendra Modi left for the US to woo investors, included a cut in the corporation tax rate to 22 per cent from 30 per cent for companies not availing of exemptions such as tax holidays enjoyed by units in special economic zones (SEZs) or accelerated depreciation.

Earlier Sitharaman had announced the 25 per cent rate would be eventually made applicable for all companies. Only 0.7 per cent of the companies in the country were aligned to the 30 per cent rate because the rate for companies with a turnover of up to Rs 400 crore was brought down to 25 per cent in this year’s Budget.

Currently, the tax burden after surcharges and various types of cess on large companies comes to about 34.94 per cent, which has been reduced to 25.17 per cent, Revenue Secretary A B Pandey said.

The companies that are enjoying exemptions and tax holidays and are not willing to join the new tax regime can do so after the sunset clause on their tax breaks kicks in. However, once they join the new tax regime, they have to stay there, Sitharaman said.

The government is projected to forgo revenue of Rs 1.08 trillion in exemptions given to companies in 2018-19, which is 15.3 per cent higher than the Rs 93,642 crore in the previous year, according to Budget papers.

Most IT companies, Infosys excepted, may not receive benefits from this move because of various exemptions they enjoy, but others, including financial services firms, may get a fillip.

For the companies getting incorporated next month onwards and start production before March 31, 2023, would get a reduction in the corporation tax rate from 25 per cent to 15 per cent. With cess and surcharges this comes to 29.12 per cent at present and with the new rate structure, it will come to 17.01 per cent. These companies also need not pay the minimum alternate tax (MAT).

To provide relief to companies which continue to avail of exemptions and incentives, Sitharaman also announced a reduction in the minimum alternate tax (MAT) to 15 per cent from the current 18.5 per cent. With cess and surcharge, this comes to 21-22 per cent at present and will be reduced to 17 per cent.

Sitharaman extended the exemption from the super-rich tax introduced in her maiden Budget on July 5 to capital gains arising on sales of equity shares in a company or businesses that are liable to pay the securities transaction tax (STT).

The enhanced surcharge will also not apply to capital gains arising on sales of securities, including derivatives, in the hands of foreign portfolio investors, she said.

To provide relief to listed companies that announced buybacks of shares before July 5, the tax on such buyback shall not be charged.

The government also expanded the scope of corporate social responsibility to include incubators funded by the Centre or state governments, and public-sector units, and making contributions to publicly funded research institutions and universities.

Sitharaman, however, sidestepped repeated questions on the impact of the concessions on the fiscal deficit target, saying that the government was conscious of the reality and would reconcile the numbers. The government has projected its fiscal deficit to reduce to 3.3 per cent of gross domestic product (GDP) in FY20 from 3.4 per cent in the previous financial year. The deficit has touched 77.8 per cent of the target in the first four months of the current fiscal year.

“We are seized of the matter. We are not oblivious of this development,” she said, adding that the cut in taxes also expanded the basket of tax payers. These cuts were the steepest in recent history.   The original task force entrusted with the responsibility of re-designing India’s income tax law, under former direct tax board member Arbind Modi, had proposed a 15 per cent corporate tax rate across the board. This was, however, to be complemented with changes in accounting procedures, and modification in the rule for source of income.

Growth plunged to more than a six-year low of 5 per cent in the first quarter of the fiscal year owing to slackening private investment and weak demand. While the tax rate on new companies manufacturing in India stands at 17.01 per cent and 25.17 for others, it is 21 per cent in the US, where it was 35 per cent earlier. Among competitive economies, Vietnam, which is turning the US-China trade war to good account, has a 20 per cent tax rate. Indonesia has 25 per cent and Thailand 20 per cent. Singapore has a tax rate almost equal to that for new companies in India, at 17 per cent. Hong Kong has a lower rate of 16.5 per cent. The brass of the government hailed the move. “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 tweeted.

Union Home Minister Amit Shah said the Modi government was committed to making India a big manufacturing hub, and this decision, along with previous announcements on relaxing foreign direct investment, would go a long way in realising this objective. 

Kumar Mangalam Birla, chairman, Aditya Birla Group, said the government’s move to pump-prime the economy would lead to a big reset and revive the animal spirits in Corporate India.  SBI Chairman Rajnish Kumar said the move would boost corporate profits and bring down prices. “Additionally, the move to incentivise setting up manufacturing units comes at the most opportune time for multinationals,” he said.

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