Finance Minister Nirmala Sitharaman announces corporate tax cut to spur growth

In an effort to boost investment and growth to revive the sluggish economy, Finance Minister Nirmala Sitharaman slashed corporate tax rates for domestic companies on Friday to 22% and for new domestic manufacturing enterprises to 15%. This applies to the companies which are not availing benefits of tax concessions and exemptions and was done by amending the Income Tax Act, 1961 and Finance Act, 2019. The new rates will be applicable from April 2019.

The existing rate of corporate tax applicable to domestic companies, along with surcharges and cess, is 34.94% while for new manufacturing enterprises it is 29.12%.

If the companies are not availing any tax incentives, the effective rate for the existing domestic and new manufacturing companies will now be 25.17% and 17.01% respectively. The current rate of corporate tax for the two categories is 30% and 25% respectively.

The total revenue foregone on account of reduction in the corporate tax rate and other relief is to the tune of Rs 1.45 lakh crore, the Finance Minister said. The total tax burden, after taking into account all surcharges and taxes, will now come to 25.17% from the present 34.94%.

“The important aspect is that such companies (that don't avail tax exemptions) are not required to pay minimum alternate tax (MAT),” Sitharaman said, adding “To provide relief to companies that continue to avail exemptions and incentives, MAT has been reduced from existing 18.5% to 15%.”

The effective corporate tax rate for the new manufacturing firms — those incorporated on or after October 1 and commence production from March 31, 2023 — will be 17.01%, inclusive of all surcharges and cess.

Foreign companies with offices and that run business in India will also be eligible and can opt for lower tax rate after the expiry of tax holidays and concessions availed by them.

However, after exercising the option, firms will continue to pay tax at the rate of 22% and can't go back to the old regime. For listed companies that have already announced a buyback of shares before July 5, will not be taxed on them.

To stabilise the funds into the capital market, the minister also announced that the enhanced surcharge introduced in the Budget shall not apply to capital gains arising on the sale of equity shares in a company or a unit of equity oriented fund or unit of a business trust liable for securities transaction tax (STT) in the hands of individual, Hindu Undivided Family (HUF), Association of Persons (AoP), Body of Individual (BoI) and Artificial Juridical Person (AJP).

The enhanced surcharge will also apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs).

To boost start-ups and research, the government has also decided to expand the scope of Corporate Social Responsibility (CSR) expenditure. A class of profitable companies are required to spend 2% of their average net profits of the preceding three years on welfare activities every year, as per the Companies Act, 2013. Now CSR fund can be spent on incubators funded by central or state government or any agency or Public Sector Undertaking (PSU) of central or state government, and making contributions to public-funded universities, Indian Institute of Technology (IITs), national laboratories and autonomous bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).

Currently, CSR funds can be spent only on technology incubators located within academic institutions approved by the Centre.

The effective corporate tax rate after surcharges and cess has been cut by about 10 percentage points to 25.17% from 34.94% for existing companies, and about 12 percentage points cut to 17.01% from 29.12% .

“We expect today's announcement to provide a big boost to business sentiment in the immediate term, with a modest knock-on impact on consumption demand, particularly for big-ticket items. However, the impact on fresh investment activity may be visible with a lag,” said Aditi Nayar, principal economist at ICRA. “While a fiscal slippage may be inevitable, given that the government's tax collections will fall substantially short of its budget estimates, expenditure cuts may still be required to prevent the fiscal deficit as well as G-sec yields from rising too sharply in FY2020.

Additionally, lower Central tax collections will impact the state governments' fiscal situation as well through likely cuts in central tax devolution, and borrowing constraints may necessitate state government expenditure restraint or deferral.

In light of the likely back-ended pick-up in investment activity and expenditure restraint that would be required, particularly at the state government level, we are not yet revising our FY2020 GDP forecast upward from 6.2%.”

Vikram Kirloskar, president, CII, said, “Cut in corporate tax from 30% to 22%, without exemptions, has been a longstanding demand of industry and is an unprecedented and bold move by the government.”