The NDA government slashed corporate taxes in the boldest economic step yet in its second term in an attempt to awaken animal spirits and revive private investment
Equity markets notched their best day in over a decade after the surprise cuts in corporate taxes
NEW DELHI/PANAJI :
In a bold move to reverse the economic downturn and make India an attractive investment destination, finance minister Nirmala Sitharaman on Friday slashed corporate tax rates worth ₹1.45 trillion paid by domestic manufacturers, making the country one of the lowest tax regimes in Asia.
Manufacturing companies not availing of tax sops can now opt for a 22% corporate tax rate, while new manufacturing companies that register and start production between 1 October and March 2023 can avail an even lower tax rate of 15%.
At present, business income is taxed at 30%, exclusive of cess and surcharge, other than in the case of companies with sales of up to ₹400 crore and new manufacturing companies which are taxed at 25%. Now, the effective tax rate, including cess and surcharges, for the existing companies comes down from 34.94% to 25.17%, while for new companies, it falls from 29.12% to 17.01%. Sitharaman also announced a reduction in the rate of minimum alternate tax (MAT) from 18.5% to 15%.
“The step to cut corporate tax is historic. It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win-win for 130 crore Indians," Prime Minister Narendra Modi said on Twitter.
Sitharaman’s announcement comes ahead of Modi’s visit to the US, where he will meet executives of energy companies, including BP Plc., Exxon Mobil and Schlumberger, before addressing a community event in Houston, which is expected to be attended by President Donald Trump.
Modi is also due to discuss investment opportunities with executives from US bank JPMorgan Chase, aerospace company Lockheed Martin, financial services firm Mastercard and the world’s biggest retailer, Walmart.
The lower corporate tax rates will better prepare Indian companies to compete with South East Asian economies with lower tax regimes, ahead of India concluding negotiations for a free trade agreement with the Regional Comprehensive Economic Partnership in November.
The move makes India’s corporate tax regime globally competitive, and increases post-tax earnings of companies for reinvestment and distribution to shareholders. This is also expected to help India become part of global supply chains of multinationals, especially those operating in the electronic manufacturing sector.
The US levies a 25.89% corporate tax rate, including sub-national levies on corporate income. The UK charges 19% and France 32.02%, including sub-national levies, according to the Organisation for Economic Cooperation and Development (OECD). The lowest corporate tax in Asia is Hong Kong’s 15%.
Arvind Virmani, former chief economic adviser in the finance ministry, tweeted: “One of the most important recommendations of tax economists, implemented. This will apply to new companies moving #SupplyChains to India."
However, higher taxes are just one reason for multinationals holding back from setting up manufacturing units in India, despite low labour costs. HDFC chairman Deepak Parekh said after the cut in corporate tax, the government needs to focus on land and labour reforms to attract foreign investors. “We have to show that it is easier to invest in India," he told CNBC-TV18.
Former chief statistician of India, Pronab Sen, said the tax cut is essentially a supply side measure and has very little effect on the demand constraint the economy is facing. “Investments are held up because companies have not seen demand growth. Unless that is reversed, no investment will happen," he added.
Indian businesses have been battling a demand slowdown and a liquidity crunch, which have resulted in the economic growth rate cooling to a six-year-low of 5% in the June quarter, while private consumption expenditure was at an 18-quarter-low of 3.1%. The Reserve Bank of India has been trying to improve liquidity in the system and lower the cost of funds through a series of steps, including four interest rate cuts since January, bringing the repo rate down to 5.4% in August.
Sen said the expected higher fiscal deficit due to a revenue loss of up to ₹1.45 trillion could force the central bank to cut policy rates at a slower pace than it might have contemplated.
The tax measures were enforced through changes in the Finance Act notified through an ordinance, which also rolled back the increase in surcharge on capital gains made by all investors from the sale of listed equity shares—a move aimed at lifting sentiments and boosting capital market investments. The surcharge increase, often referred to as the “super-rich tax", however, stays for income from salary, profession or rent above ₹2 crore.
The companies, which do not avail of the concessional tax regime, will continue to pay tax under the pre-amended regime. They, the minister said, can opt for the concessional tax regime after the end of the tax holidays they currently avail.
In order to provide relief to listed companies, which have already made a public announcement of a buyback before 5 July 2019, buyback of shares shall not be taxed.
The measures announced on Friday are the latest in a series of steps taken by the government almost on a weekly basis. Last Saturday, Sitharaman announced a host of steps to support two struggling sectors of the economy—housing and exports. These included easing of foreign borrowing norms to facilitate low-cost funds for affordable home buyers, a ₹20,000-crore corpus for last-mile funding of healthy housing projects, an overhaul of the tax refund schemes for exporters and priority sector tag for export credit, which will improve exporters’ access to credit.
Sudhir Kapadia, national tax leader, EY India, said the tax cut will effectively leave companies in the hitherto nominal tax rate of 35% with a direct cash booster of 10% of their profit before tax across all sectors. “Hopefully, this should result in a virtuous cycle of increasing investments, consumption and growth," he said.