Corporate Tax Rate Cut | Key Measure to Revive Economy

How Corporate Tax Rate Cut Will Impact the Economy?

Introduction

Finance Minister Nirmala Sitharaman, on Friday 20th September, announced corporate tax rate cut and many other measures to boost the growth in the economy. Let us discuss these measures and their impact on the economy.

Corporate Tax Rate Cut by FM Nirmala Sitharaman – A Key Measure to Revive Economy

Key Announcements By Finance Minister

1. To Promote Growth and Investment

• Government has done the corporate tax rate cut from 30% earlier to 22% with effect from FY 2019-20. It will allow any domestic company an option to pay income-tax at the rate of 22%. However, it is subject to condition that they will not avail any exemption/incentive.
• The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess.
• Also, such companies don’t need to pay Minimum Alternate Tax.

2. To Attract Fresh Investment in Manufacturing

• Government has done a new provision to attract fresh investment in Manufacturing and thus, to provide boost to ‘Make-in-India’ initiative.
• Any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing will have an option to pay tax at 15% from FY 2019-20. The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess.
• This benefit is available to those companies which :
  • Do not avail any exemption/incentive and
  • Will commence their production on or before 31st March, 2023
• Also, such companies don’t need to pay Minimum Alternate Tax.

3. For Companies Not Opting for the Above Concessional Tax Regime

• A company which avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period.
• After exercise of the above Concessional Tax Regime option, the companies shall be liable to pay tax at the rate of 22%. And the option once exercised cannot be subsequently withdrawn.
• For companies who continue to avail exemptions/incentives, minimum alternate tax (MAT) rate has been reduced from 18.5% to 15%.

4. To Stabilise the Flow of Funds into the Capital Market

A higher surcharge, announced in the July 2019 Budget, on capital gains on sale of equity and Equity-oriented funds made by foreign portfolio investors (FPIs) as well as individuals and other classes of domestic investors, is gone.

5. Tax Relief on Buy back of Shares of Listed Companies

There will be no tax on buyback of shares by listed companies that have made a public announcement of buyback plans before July 5, 2019.

6. Expanded the Scope of CSR 2% Spending

• Corporates can spend their CSR 2% funds on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government.
• Thus, companies can now make contributions to public funded Universities like IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology).
• These are the institutes engaged in conducting research in science, technology, engineering and medicine aimed at Sustainable Development Goals.

Comparing With Global Corporate Tax Rates

• With the rate cut in corporate tax, India now came closer to the rates prevalent in many of the emerging and industrialized countries.
• The new corporate income tax rates in India will be lower than USA (27%), Japan (30.62%), Germany (30%), Brazil (34%), Philippines (30%), SriLanka (28%) and is similar to China (25%) and Korea (25%).
• New companies in India with an effective tax rate of 17% is equivalent what corporates pay in Singapore (17%). The government hopes it will make India more appealing to multinational manufacturers that are preferring countries such as Vietnam, Taiwan, Thailand (20%) and Malaysia(24%).
• With a lower tax rate for new manufacturers, the government is looking to attract investment flowing out of China following its trade dispute with the US.
• However, India needs to also remove other major obstacles for multinationals like poor infrastructure, stringent labour laws, delays in land acquisition etc. Then only India is considered as an alternative destination to the neighbouring country.

What Will It Achieve?

This Corporate rate cut move will likely change the profitability dynamic of the Indian corporate ecosystem as a whole.

• Improved Profit Margin of Corporates : Lower taxes should result into higher profit margins. This should support their books.
• Lower Prices : Some of the companies with improved profit margins should be able to pass on their higher margins in the form of lower product prices to consumers.
• Increase in Investments & Capital Expenditure : Lower corporate income tax rates and the resultant change in profitability will likely prompt companies to invest more. It will result in raising their capital expenditure (Capex).
• Improvement in Employment Growth : Additional induced capacities by the companies will encourage hiring more employees and eventually lead to improvement in Employment Growth.

The Cost of Measure – How Will the Rate Cuts be Funded?

• The revenue foregone on reduction in corporate tax and other relief measures will be Rs.1.45 lakh crore annually.
• Thus, the added cost of these measures taken has triggered concerns of fiscal slippage. The government has set a fiscal deficit target of 3.3% of GDP for FY2019-20. Lower tax revenues could disturb the fiscal calculations, because the tax collections have been far below the budgeted estimates.
• The government may fund part of the revenue foregone because of corporate tax cuts through the additional transfer of dividends and surplus from the Reserve Bank of India (RBI).
• On 26th August 2019, RBI had decided to transfer RBI’s surplus funds of Rs.1.76 Lakh Crore to the Government.
• The total surplus funds of Rs.1.76 Lakh Crore transferred comprises of 2 parts :
  • Rs.1.23 lakh crore of surplus or dividend for the year 2018-19 and
  • Rs.52,637 crore was from surplus reserves or accumulated savings of RBI, which is the excess provision identified as per the revised Economic Capital Framework (ECF) recommended by Bimal Jalan committee.
• The government had budgeted for Rs.90,000 crore from RBI dividends. It now has an additional Rs.58,000 crore, which can be used to plug revenue gaps.