Corporate Tax Rates Slashed To 22%

Finance Minister Nirmala Sitharaman today announced a big reduction in income tax rate for corporates. 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 today will cost the government ?1.45 lakh crore per year, the finance minister said. While that will raise the deficit, already under stress since the tax targets were too ambitious to begin with, it doesn’t really matter; the sensex rose 1500 points within a short while of the announcement.

Diwali came early for India Inc after the Centre slashed effective corporate tax to 25.17 per cent inclusive of all cess and surcharges for domestic companies. Making the announcement, Finance Minister Nirmala Sitharaman said the new tax rate will be applicable from the current fiscal which began on April 1.

The move puts India’s tax rate on par with Asian peers and will boost efforts to attract investments as companies look for alternative destinations to sidestep supply chain disruptions from the U.S.-China trade war.

RBI Governor Shaktikanta Das welcomed the government announcement, calling it a “bold move.’’ Domestic investor wealth soared by Rs 2.11 lakh crore in morning trade on Friday.

Key Announcements

• Govt proposes to slash corporate tax rate for domestic tax rate
• Ordinance regarding this has already been passed
• A domestic company can pay income tax at 22% if they don’t seek any exemption or incentives
• Effective Tax Rate 25.17% inclusive of all surcharges and cess for such domestic companies
• Such companies also not required to pay Minimum Alternative Tax
• Companies availing exemptions can opt to pay tax of 22% after the exemption period is over
• 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
• The govt expects to widen tax basket with lower tax rate
• Buybacks pre-July 5 exempted from buyback tax
• For new manufacturing companies that start production before March 2023 and incorporated on or after 1st October 2019, corporate tax rate brought down to 15% from 25%
• 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
• MAT for companies that want to use tax exemptions cut to 15% from 18.5%
• New tax rate will be applicable from the current fiscal which began on April 1.
• Companies can opt for lower tax rate after expiry of tax holidays and concessions that they are availing now.

Here’s What You Should Know

1. New provision inserted in the income tax act with effect from fiscal year 2019-20, that allows any domestic company to pay income tax at the rate of 22% subject to condition they will not avail any incentive or exemptions.
2. Manufacturing companies set up after October 1 to get option to pay 15% tax. Effective tax rate for new manufacturing firms to be 17.01% inclusive of surcharge & tax.
3. Listed companies that have announced buyback before July 5, 2019, tax on buyback of shares will not be charged
4. Higher surcharge will also not apply on capital gains on sale of security including derivatives held by FPIs
5. Enhanced surcharge will not apply to capital gains arising on equity sale or equity-oriented funds liable to STT stabilise flow of funds into capital markets
6. To provide relief to companies availing of concessions and benefits, a MAT relief by reducing it from 18% to 15%
7. CSR 2% spending to include government, PSU incubators and public funded education entities, IITs

The enhanced surcharge introduced by the Finance (No.2) Act, 2019 shall not 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 securities transaction tax, in the hands of an individual, HUF, AOP, BOI and AJP. The enhanced surcharge shall also not apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs). In order to provide relief to listed companies which have already made a public announcement of buy-back before 5th July 2019, it is provided that tax on buy-back of shares in case of such companies shall not be charged.

The Government has also decided to expand the scope of CSR 2 percent spending. Now CSR 2% fund can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government, and, making contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.

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