Related Topics: Indian Economy, Government Policies & Initiatives
- Finance Minister Nirmala Sitharaman has announced big cuts in corporate tax rate, giving a ₹1.45 lakh crore stimulus aimed at reviving private investment and lifting growth from a six-year low.
- The government has promulgated an ordinance – the Taxation Laws (Amendment) Ordinance 2019 to make amendments in the Income-tax Act and Finance Act 2019.
Existing Domestic Companies
- All domestic companies will be allowed to pay corporate tax at the rate of 22% (effective rate 25.7% including cess and surcharge) from 30%.
- This would be subject to the condition that these companies do not avail of any tax incentives or exemptions.
- Moreover, no Minimum Alternative Tax (MAT) would be imposed on these companies.
Domestic Companies incorporated on or after 1st October 2019
- To boost manufacturing and the ‘Make-in-India’ initiative, the government has slashed corporate tax rate to 15% (effective rate 17.01%), from 25%, for domestic companies incorporated on or after 1st October 2019 making fresh investment in manufacturing.
- No MAT will be imposed on these companies either.
- This will be subject to the condition that the company does not avail of any tax incentives or exemptions and commences production by 31 March, 2023.
Minimum Alternate Tax (MAT)
To provide relief to companies that continue to avail of exemptions and incentives, the rate of MAT has been reduced from 18.5% to 15%.
- Enhanced surcharge introduced by the Finance Act 2019 shall not apply to capital gains arising on sale of equity share in a company/unit of equity-oriented fund or unit of business trust liable for securities transaction tax.
- Enhanced surcharge shall not apply to capital gains on sale of any securities, including derivatives, in the hands of Foreign Portfolio Investors (FPIs).
Companies availing Tax Exemption
- A company which does not opt for the concessional tax regime and avails the tax exemption/incentive can continue to pay tax at the pre-amended rate.
- After expiry of their tax holiday/exemption period, these companies can opt for the new concessional tax regime.
To provide relief to listed companies that had announced share buyback before 5th July 2019, the government exempted such companies from buyback tax announced in the Budget.
Why the government is cutting taxes?
- The corporate tax cut is part of a series of steps taken by the government to tackle the slowdown in economic growth, which has dropped to 5% in the June quarter.
- Many investors have expressed concerns over the additional taxes that were announced by the government during the budget in July 2019 and began pulling money out of the country.
- The government hopes that the new, lower tax rates will attract more investments into the country and help revive the domestic manufacturing sector which has seen lackluster growth.
Impact of Tax Rate Cut
- The corporate tax rate is a major determinant of how investors allocate capital across various economies.
- Tax cuts can offer people more incentive to produce and contribute to the economy, by putting more money in the hands of the private sector.
- The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
- However, the tax cut is expected to cause a yearly revenue loss of ₹1.45 lakh crore to the government which is struggling to meet its fiscal deficit target.
- At the same time, if the tax rate cut manages to sufficiently revive the economy, it can help boost tax collections and compensate for the loss of revenue.
- Some economists believe that the current economic slowdown is due to the problem of insufficient demand which cannot be addressed just through tax cuts and instead advocate greater government spending to boost the economy.
- Others, however, argue that lackluster demand faced by sectors like automobiles is merely a symptom of supply-side shocks such as the goods and services tax that have affected various businesses and caused job losses. In that scenario, tax cuts and other supply-side reforms can indeed help the economy recover from its slump.
- The Government should try to simultaneously enact other structural reforms that reduce entry barriers in the economy along with these tax cuts and make the marketplace more competitive.