Indian Government’s boldest move yet: Corporate Tax Cuts

Big boost to manufacturing during times of pain; India’s taxation regime becomes attractive for investments and new companies

In a bold and significant move, the government has reduced the corporate tax rate sharply for domestic companies and announced a lower corporate tax rate for manufacturing companies incorporated on or after October 2019. This is a major step to revive push activity and aid industry at a time when economic momentum has slowed significantly on the back of sharp slowdown in consumption and private investments.

The corporate tax cut along with the withdrawal of tax surcharge on foreign portfolio investors (FPIs) resulted in the stock market bellwether index BSE Sensex moving up by over 5% and the Indian rupee gaining by nearly 0.6%. The major announcements are:

·    With effect from FY 2019-20, domestic companies will pay corporate tax at a rate of 22%, down from 30% at present, but without any exemption or incentive. The effective tax rate will be 25.17% including surcharge and cess. Moreover, companies will not be required to pay any Minimum Alternate Tax (MAT).

·    In an effort to boost ‘Make in India’ and manufacturing investments, corporate tax rate on new manufacturing companies incorporated on or after 1st October 2019 will be levied at 15%. The effective tax rate will be 17.01% inclusive of surcharge. Companies are not allowed to avail any exemption or incentive and needs to commence production on or before 31st March 2023.

·    Companies can choose not to pay the concessional corporate tax rate and avail tax exemptions or incentives. MAT will be levied at lower rate of 15%, down from 18.5% at present, on these companies

·     Foreign companies which operate in India through joint ventures or have subsidiaries can avail the concessional corporate tax rates

·    Tax surcharge will not apply to capital gains from sale of securities by FPIs.

·    Tax on buyback of shares will not apply to all listed companies, which have made announcements on share buybacks before 5th July 2019.

Major fiscal boost to the slowing economy

The government has stated that the tax cuts will entail foregone revenue worth INR 1.45 trillion and it will monitor the impact of the lower revenue on fiscal deficit. This is a significant change to the fiscal consolidation path that the government has laid out in recent years. The fiscal deficit has come down in recent years and the government had intended to stick to the target of 3.3% of GDP in FY 2019-20. However, a sharp slowdown in economic growth – 5% in Q1 FY 2019-20 – along with anaemic levels of private consumption and investments have forced the government’s hand and deferred fiscal consolidation for the time being. While the fiscal stimulus will have an impact on the fiscal deficit target, it will also be key in returning the economy to a high growth path.

The major impact on core manufacturing industries especially FMCG and auto sector, which needed policy support to tide over the recent tough times.

 Government addresses a long standing industry demand

This countercyclical fiscal policy, involving tax cuts and higher government spending during a recession, shows that the government was concerned about the extent of slowdown and the need to increase private investments. Lower corporate tax rate was also a long standing industry demand as other major nations have a lower rate, thereby making India globally less competitive. In the Union Budget in July this year, the corporate tax rate was reduced to 25% for firms with turnover up to INR 4 billion. This was not deemed as enough.

Therefore, the new tax cuts address the demands from the corporate sector. This will incentivize businesses to go ahead with their investments and pass on lower costs to consumers, effectively driving consumption. The lower MAT rate of 15% will also be beneficial for units in Special Economic Zones (SEZs) though the demand for extension of the SEZ Sunset Clause needs careful consideration by the government. 

New tax rate brings India on par with global competitors

The new effective corporate tax rate of 25.17% places India on the same level as major Asian peers such as China and Indonesia, which have a corporate tax rate of 25%. Moreover, the 17.01% effective rate for new manufacturing companies goes further and brings India on par with more developed nations such as Singapore, which has a corporate tax rate of 17%.

The Indian corporate tax regime will now become globally competitive at a time when countries are looking to attract foreign investors amidst deepening US-China trade tensions. The government intends to push ‘Make in India’ and improve manufacturing contribution to GDP to 25% from around 17% at present. Lower corporate taxes work in favour of this objective with the added opportunity to create millions of jobs for the country’s youth.