To Tackle Economic Crisis Govt Slashes Corporate Tax Rate 10%

In the biggest reduction in 28 years, the Government on September 20 slashed corporate tax by almost 10 percentage points as it looked to pull the economy out of a six-year low growth and a 45-year high unemployment rate by reviving private investments with a Rs 1.45-trillion tax break. Two-and-a-half-months after presenting her maiden Budget that was hailed as “development-friendly” and “future-oriented”, Finance Minister Nirmala Sitharaman announced cutting corporate tax rate to 25.17 per cent to bring them at par with other Asian countries such as China and South Korea but at the possibility of breaching the 3.3 per cent fiscal deficit target.

The cumulative revenue growth of 642 companies in Indian corporate sector skidded to an 11-quarter low at 5.7% in the April to June quarter of current financial year mainly due to weak consumer sentiments and subdued government spending on infrastructure, according to ICRA Ratings.

The financial results of ICRA’s sample companies were reflected in a sequential contraction of 7.7% in revenues from consumer-oriented sectors.

Additionally, demand from the infrastructure segment was down with government spending on infrastructure projects reducing in the run-up to the general elections in January to March and April to June quarters.

This was reflected in the sharp slowdown in growth in gross fixed capital formation during the two quarters to 3.6% and 4% and the slowdown in cement production volume growth

And to tackle all this the finance minister the fourth tranche of post-budget economic stimulus measures, she cut base corporate tax for existing companies to 22 per cent from current 30 per cent; and for new manufacturing firms, incorporated after October 1, 2019 and starting operations before March 31, 2023, to 15 per cent from current 25 per cent. The new tax structure is effective from April 1, 2019. It will cost the government Rs 1.45 trillion in revenue annually and may potentially derail the country’s fiscal deficit roadmap. This will be effective on the condition that these companies will not avail any other incentive or concession such as tax holiday enjoyed by units in Special Economic Zones (SEZ) and accelerated depreciation.

The effective tax rate for existing units, after considering surcharges and cess such as Swachh Bharat cess and education cess – which are levied on top of the income and corporate tax rates, will be 25.17 per cent as compared to 34.94 per cent now. For new units, it will be 17.01 per cent now as opposed to 29.12 per cent.

Sitharaman also said no tax would be charged on share buyback by listed companies that announced such a move before July 5. Also, super-rich tax by way of enhanced surcharge on income, announced in the July 5 Budget, will not apply to capital gains arising on equity sale or equity-oriented funds liable to securities transaction tax (STT) to stabilise the flow of funds into capital markets. Also, the companies will not have to pay minimum alternate tax (MAT). She said any company which does not opt for concessional tax regime and avails tax exemptions or incentives should continue to pay tax at pre-amended rates.

The reduction in corporate tax, which India Inc hailed as the one which will revive growth and investment, is the single biggest cut in tax rates since India opened up its economy in 1991.  India had the highest effective corporate tax rate of 38.05 per cent in 1997.

This will be subject to the condition that these companies will not avail any other incentive or concession such as tax holiday enjoyed by units in Special Economic Zones (SEZ) and accelerated depreciation.

The effective tax rate for existing units, after considering surcharges and cess such as Swachch Bharat cess and education cess — which are levied on top of the income and corporate tax rates, will be 25.17 per cent as compared to 34.94 per cent now. For new units, it will be 17.01 per cent as against 29.12 per cent now.

Companies in China, South Korean and Indonesia pay 25 per cent tax, while those in Malaysia pay 24 per cent. Only Japan has a higher tax than India at 30.6 per cent. Hong Kong has the lowest corporate tax rate of 16.5 per cent, Singapore has 17 per cent, Thailand and Vietnam levy 20 per cent tax.

The Government had budgeted Rs 16.5 trillion as tax revenue in fiscal to March 31, 2020. Sitharaman also said no tax will be charged on share buyback by listed companies that announced such a move prior to July 5.

Also, the companies will not have to pay minimum alternate tax (MAT). She said any company which does not opt for concessional tax regime and avails tax exemptions or incentives shall continue to pay tax at pre-amended rates. “These companies can opt for concessional tax regime after the expiry of tax holiday or exemption,” she said.

To provide relief to companies which continue to avail exemptions and incentives, rate of MAT has been reduced from existing 18.5 per cent to 15 per cent.

By:  Babita Sharma, Editor, INBA Viewpoint