New Delhi: Finance minister Nirmala Sitharaman announced her latest round of measures aimed at boosting the sluggish Indian economy: slashing corporate tax rates for domestic companies and setting up a new 15% rate for manufacturing companies set up after October 1.
It is unclear at the moment how many companies will face an effective reduction in their tax burden, but Sitharaman said the revenue foregone as a result of the measures announced today would be Rs 1.45 lakh crore annually.
In a press conference held just before the meeting of the Goods and Services Tax Council, the finance minister announced that the corporate tax rates for domestic companies would be 22% if they did not avail of any other exemption or concession.
Thus, the effective rate for these companies will be 25.17% including cess and surcharge, she said. Firms that opt for the 22% tax slab will also not have to pay any minimum alternate tax (MAT).
India’s current corporate tax rate for companies with over Rs 400 crore turnover is officially 30%, but the effective tax rate (lowered by various concessions and exemptions) often ranges between 24% and 28% for different sectors.
Companies that have a turnover of less than Rs 400 crore come under the 25% corporate tax bracket.
Sitharaman also announced that an even lower official corporate tax rate of 15% will apply to new manufacturing companies set up after October 1, 2019, Sitharaman said.
The effective tax rate for these firms will be 17.01%, inclusive of surcharge and other taxes.
All these changes, the finance minister said, will be applicable for the current fiscal year, which began on April 1, 2019.
Besides this, Sitharaman also announced a series of mini tax bonanzas: Listed companies that announced a buyback of shares before the Union budget (July 5) will not be charged. Similarly, the higher surcharge announced in the budget will not apply on capital gains on sale of security including derivatives held by FPIs.
Lastly, to also provide some relief to companies that avail of various tax concessions and benefits, a MAT sop has also been announced by reducing it from 18% to 15%.
“Revenue foregone for the reduction in corporate tax rate is Rs 1.45 lakh crore per annum,” Sitharaman told reporters. However, she added, the economic buoyancy brought about from the reduction of these rates will make up for any revenue loss and it is believed that the tax basket will also expand with a reduction in rates.
“The government has taken a bold and proactive step to bring the much-needed tax reforms, which will boost investment and also aid to private cycle capex. The lowering of corporate tax rates will widen the tax net and gradually bring in more revenues to the government. Overall, the move will make Indian companies globally competitive, a welcome step to arrest slowdown and lift up the market sentiments,” said Sanjeev Hota, Head of Research, Sharekhan, in a statement.
Markets react enthusiastically
Indian equity markets roared on Friday morning, largely in response to Sitharaman’s announcement.
At 11:48 am, the 30-share benchmark Sensex was up over 3% or 1,600 points. The Nifty 50 was up 2.31% at 10,951.95 points. If this trend holds, it will be the biggest one-day gain in over 10 years.
Most players in the Sensex pack were trading in the green, with Tata Steel gaining the most at 5.19%. It was followed by Maruti Suzuki (up 5%), HDFC Bank (up 4.86%), and Reliance Industries (up 3.50%).