All You Need To Know: In Major Reform Government Cuts Corporate Tax Rates To Boost Growth

In a surprise and largely unanticipated move and perhaps the biggest by Prime Minister Narendra Modi-led NDA government in its second term, it has slashed corporate taxes with an aim to revive private investment. It also seeks to lift growth from a six-year low that has led to job losses and has fuelled discontent in the hinterlands.

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Now, corporate tax rate will be slashed to 22 per cent for domestic companies and 15 per cent for new domestic manufacturing companies. A slew of other fiscal reforms are also likely to be introduced. The total revenue foregone for the reduction in corporate tax rate and other relief is estimated at a whopping Rs 1,45,000 crore.

The persisting economic slowdown, which dragged down the GDP growth to a six-year low of 5 per cent in the April-June quarter of the current fiscal, is raising concerns among corporate houses and experts on the economy.

Fears of a prolonged downturn and further job losses due to low consumer sentiment and implications of global trade war have been ruling the roost for several past weeks as all economic indicators pointed to a massive slowdown.

In the wake of this, the government has brought in the Taxation Laws (Amendment) Ordinance 2019 to effect lower tax for corporates.

A company, which does not opt for the concessional tax regime and avails the tax exemptions, would 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 the exercise of the option they shall be liable to pay tax at the rate of 22 per cent and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5 per cent to 15 per cent," a Finance Ministry statement said.

In order to stabilise the flow of funds into the capital market, the government has further stated that the enhanced surcharge will 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.

"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 July 5, 2019, it is provided that tax on a buy-back of shares in case of such companies shall not be charged," the statement said.

Congress leader Jairam Ramesh welcomed the reduction in corporate tax rate but expressed doubts on whether the step will revive investment. The government's move, he said, does nothing to dispel the fear that pervades India Inc.

"A headline-itis afflicted, panic-stricken Modi Sarkar has cut corporate tax rates less than 3 months after a Budget and 4 months before the next one. This is welcome but it is doubtful whether investment will revive. This does nothing to dispel fear that pervades in India Inc'," Mr Ramesh wrote on Twitter.

Finance Minister Nirmala Sitharaman said the reduction in tax rates has been done by promulgating an ordinance to an amendment to the Income Tax Act.

Indian shares jumped almost five percent after the government announced it was slashing corporate taxes in an effort to boost the sagging economy. In Mumbai just before midday (0630 GMT) the main Sensex index was up 1,841 points or 4.87 percent at 37,850 points. The Nifty 50 was up 513 points or 4.81 percent at 11.220 points.

AFP

This year India lost its status as the fastest-growing major economy to China, and in the last quarter -- from April to June -- gross domestic product (GDP) expanded by just 5.0 percent.

In the latest of a series of announcements since Prime Minister Narendra Modi won a second term in May, Finance Minister Nirmala Sitharaman said that the main corporate tax rate for domestic firms would be cut to 22 percent from 30 percent.

The government, while pinning some of the blame on ride-hailing services like Uber, has attempted to help the sector by lifting a ban on purchasing new vehicles by government departments.

It has also sought to jumpstart lending by lenders -- which are suffocating under a mountain of bad debt -- by announcing the mergers of 10 state banks.

With Inputs From Agencies