Government's Revolutionary Mantra Promoting Economical Growth via Corporate Income Tax Slashes
20th September 2019 marked a crucial day for the Indian economy that was facing significant setbacks over the past few years, desperately signalling for change. Implying solution, India’s Honourable Finance Minister, Nirmala Sitharaman announced the slash of corporate taxes for domestic companies from 30 percent to 22 percent denoting a huge relief on the economy. In order to promote growth and investment, the new provision inserted in the Income-tax act will be effective from the first of October, allowing any domestic company the option to pay income tax at the rate of 22 percent subject to condition that they will not avail any exemption/incentive. This tax rate cut hints at augmenting business investments, especially at a time when growth rate has slowed down to a six-year low of five percent in the June quarter.
Further, to attract fresh investment in manufacturing activities and thereby giving boost to the ‘Make in India’ drive, another provision has been included in the Income Tax Act to tax any new domestic company incorporated on or after first October 2019 and making fresh investments in manufacturing an option to pay a tax of 15 percent. The minister said, “This benefit is available to companies that do not avail of any tax incentives and commence production on or before 31st March 2023. The effective tax rate for these companies shall be 17.01 percent inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax”. A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. In stating these exemptions overall, the total revenue foregone for the reduction in corporate tax rate and other relief estimates at 1, 45,000 crore.
Making a note-worthy remark on the same, Rajiv Singh, CEO, Karvy Stock Broking states, “A similar step of corporate tax rate cut by the Trump administration in 2017 resulted in a robust US economy post that announcement. Other steps announced by the finance minister include a tax rate of 15 percent for new manufacturing companies commencing post Oct’19, removal of surcharge on capital gains on sale of equity shares and unit repealed including derivatives and MAT rate reduced from 18.5 percent to 15 percent. The above measures will act as a catalyst for supporting the slowing investment rate, boost corporate earnings and improve aggregate demand as corporates pass on some of the benefits to consumers and attract FPI flows into India.”
Bracing for Positive Impacts
According to the new act, several industries have attributed positive impacts, mainly being the industry of real estate and construction, to which Ramesh Nair, CEO & Country Head – India, JLL states, “This is definitely a welcomed move as it is likely to aid the real estate sector and specifically promote affordable housing. As MAT provisions (15 percent reduction from the existing 18.5 percent for companies) are applicable to the profits of the housing projects eligible for deduction under the clauses of Section 80-IBA, it would specifically support developers operating in special economic zones (SEZ). The real estate sector has been demanding the removal of MAT for SEZ developers. SEZs and their development are crucial to the growth of the office segment, logistics & warehousing and manufacturing sectors in the country. Their development has in turn contributed significantly to the overall growth of the neighbouring regions and propelled the housing sector and this move has truly justified their cause.”
In other instances of positive impacts, Sanjeev Hota, Head of Research, Sharekhan, stated, “The government has taken a bold and proactive step to bring the much-needed tax reforms, which will boost investment and also aid to private cycle capex. The lowering of corporate tax rates will widen the tax net and gradually bring in more revenues to the government. Overall, the move will make Indian companies globally competitive, a welcome step to arrest slowdown and lift up the market sentiments. ”
Key Highlights in a Nutshell
In stating that the new provision has released economy boosters, citing its salient features only deems necessity, some of which are stated below.
- As effective from the fiscal year 2019-20, any domestic company is allowed to pay income tax at the rate of 22 percent subject to prior mentioned conditions.
- Manufacturing companies set up on or after October first to avail an option to pay 15 percent tax and effective tax rate for new manufacturing firms to be 17.01percent inclusive of surcharge & tax.
- Listed companies that have announced buyback before July 5, 2019, tax on buyback of shares will not be charged.
- Higher surcharge will also not apply on capital gains on sale of security including derivatives held by FPIs
- Enhanced surcharge will not apply to capital gains arising on equity sale or equity-oriented funds liable to STT stabilise flow of funds into capital markets
- To provide relief to companies availing of concessions and benefits, a MAT relief by reducing it from 18percent to 15percent.
- CSR 2percent spending to include government, PSU incubators and public funded education entities, IITs
Also, firms have now been permitted to use their two percent CSR spend on incubation, IITs, NITs, and national laboratories. Nirmala Sitharaman has herself expressed confidence that these tax concessions will eventually bring investments in Make in India, boost employment opportunities and economic activity in the country, subsequently leading to more revenue.