Corporate Taxes slashed for India Inc. - an Opinion


Corporate Taxes slashed for India Inc. – an Opinion

Today, 20th September, Finance Minister Nirmala Sitharaman announced, through a presidential ordinance, a huge reduction in income tax rate for corporates in India. The government has slashed basic corporate tax rate to 22% from 30% while for new manufacturing companies it has been cut down to 15% from 25%. Over the past few weeks, the government has been announcing a series of measures to boost growth that had fallen to six-year low of 5% in June quarter. Revenue foregone for the reduction in corporate tax rate and other relief measures announced will cost the exchequer ₹1.45 Lakh Crores per annum, projects the Ministry.

A domestic company can now pay income tax at 22% p.a. if they don't seek any exemption or incentives/tax holidays as offered by the Indian income tax laws currently.  The effective tax rate will however be 25.17% p.a. inclusive of all surcharges and cess for such domestic companies.  Such companies will also be not required to pay Minimum Alternative Tax (MAT).  Further, Companies availing exemptions/incentives/tax holidays currently, can opt to pay tax of 22% p.a. after their exemption/incentive period is over.

Separately, it also decided that enhanced surcharge announced in Budget shall not apply on capital gains arising on sale of any securities including derivatives in the hands of foreign portfolio investors.  This move is designed to encourage foreign investments in markets.

Also, Buybacks planned by corporates of their shares, pre-July 5-19, have been exempted from buyback tax.

Enhanced Surcharge announced in Budget not to apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for STT

Through this move, it appears the government is expecting to widen tax basket with a lower tax rate.

For new manufacturing companies that start production before end of March 2023 and if they were incorporated on or after 1st October 2019, their corporate tax rate is brought down to 15% from 25% p.a.

The MAT for companies that want to continue using tax exemptions/incentives/tax holidays has also been cut to 15% from 18.5% p.a. which is a relief too. 

New tax rate will be applicable from the current fiscal which began on April 1, 2019.

In our opinion, a preliminary analysis, it seems 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% p.a. effectively this means a reduction from the present peak rate of 34.94% to 25.17% p.a. To provide a fillip to domestic manufacturing, a bigger cut for newly set manufacturing companies was also announced, with their effective tax rate going down to 17.01%.

Despite the cuts costing an estimated Rs. 145,000 Crores, 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 for 2019-20 and the option once exercised, cannot be subsequently withdrawn for 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 who opt for the reduced tax rate (and who are thus out of the MAT framework) will be able to utilize their existing MAT credits going forward.

Interestingly, no cuts are 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 utilise the extra cash flow generated through these Tax Savings, to make more productive investments and grow sustainable.

To level the playing field between firms and individuals, and to potentially garner higher taxes, will the FM now extend this option to the individual income tax payers as well?  That remains to be seen in the run up to this Diwali.

For any queries on this article, feel free to write to us at info@gjmco.in

Thanks & Best regards,
Knowledge Base Team
GJM & Co.
Chartered Accountants


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