In one stroke, India undertook possibly the most radical tax cuts in its history. While corporate tax rates in the low 20s are increasingly becoming the norm globally, a nearly 10% percentage point cut in the rate for Indian companies is revolutionary. The peak corporate tax rate was cut from 30% to 22%. Effectively, this means a reduction from the present peak rate of 34.94% to 25.17%. To provide a fillip to domestic manufacturing, a bigger cut for newly set-up manufacturing companies was also announced, with their tax rate going down to 17.01%.

Despite the cuts costing an estimated 145,000 crore, the government seems to be banking on the market belief that lower tax rates will boost growth, investments and employment, and ultimately lead to improved revenues. At a micro level, there are several interesting points worth noting.

It is apparent that after years of trying to eliminate tax incentives, the government has now attempted to simply sidestep them by making the lower tax rate conditional upon not availing any exemptions/incentives.

However, keeping in line with the need to boost employment generation, incentives for hiring new employees will continue to be available. Companies, which avail of SEZ benefits, R&D incentives or accelerated depreciation, will now need to make a choice between staying in the existing regime, or transitioning to the new reduced rate. The option of availing a reduced corporate tax rate needs to be exercised on or before the due date of furnishing the income tax return and, the option once exercised, cannot be subsequently withdrawn for the same or any other year.

Elimination of minimum alternate tax (MAT) for companies opting for this reduced rate regime, as well as the overall reduction in the MAT rate from 18.5% to 15%, is also a very positive step. With significant changes in accounting standards in recent years, and the phase-out of most exemptions, a rethinking of the MAT framework was overdue.

This move will now limit the applicability of MAT only to those companies which continue to claim tax incentives, and that too at a lower rate of 15%. This, however, raises a question as to whether companies that opt for the reduced tax rate (and are thus out of the MAT framework) will be able to utilize their existing MAT credits going forward.

Interestingly, no cuts were proposed for foreign companies, which continue to be taxed at 43.68%. For foreign companies operating through branches in India, this cut may make operating through local subsidiaries more attractive. Similarly, no rate changes are proposed for LLPs and partnerships, but unlike companies, these entities are not liable to additional taxes on distributions. The exclusion of the buyback tax on listed companies, which had made public announcements for buybacks before 5 July 2019, is also a good move, albeit a bit delayed considering that a few companies have withdrawn their buyback schemes after that date.

With the announcement of these measures, a much-required intervention has been made by the finance minister for boosting economic activity and employment in India. It’s now over to India Inc. to wisely utilize the extra cash flow generated through this tax savings bonanza, to make more productive investments and grow sustainably.

Hitesh D. Gajaria is partner and co-head, tax, at KPMG India.

My Reads Logout