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India Slashes Corporate Tax Rates

India Slashes Corporate Tax Rates

In a new chapter in the current race to the bottom, India has slashed its basic corporate tax rate from 30 to 22 percent and the one that’s applied to new manufacturing business from 25 to 15 percent.

India’s Finance Minister Nirmala Sitharaman announced this decision in an effort to boost the country’s economy, one that has been rapidly slowing down and hit a six-year low in growth this past June.

As part of this announcement, Sitharaman said, “Tax concessions will bring investments in Make in India, boost employment and economic activity, leading to more revenue.” 

More specifically, as explained by the India Times’ The Economic Times, here are the new law’s basic tenets:

  • “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.
  • 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.
  • Listed companies that have announced buyback before July 5, 2019, tax on buyback of shares will not be charged
  • Higher surcharge will also not apply on capital gains on sale of security including derivatives held by FPIs
  • 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
  • To provide relief to companies availing of concessions and benefits, a MAT relief by reducing it from 18% to 15%
  • CSR 2% spending to include government, PSU incubators and public funded education entities, IITs.”

Markets reacted to this new very positively.

As reported by The Economic Times, “BSE market capitalisation surged to 143.45 lakh crore compared to Rs 138.54 lakh crore on Thursday, as the BSE Sensex soared 1,800 points, and the NSE barometer Nifty50 jumped 500 points, their highest intraday gains in a decade.”

This tax will be applicable as of April 1, 2019.

Analysts & Local Industry Praise India’s New Corporate Tax Rate

Analysts & Local Industry Praise India’s New Corporate Tax Rate

Sadanand Dhume of the American Enterprise Institute in Washington, DC, commended this move but said work is still required to boost the economy.

Dhume said: “This is a significant move by India to reassure the business community that the Modi government is not hostile to their interests. But by itself it may not be enough to revive the investment climate. The government will need to take other measures — such as privatising loss-making state-owned firms, simplifying an overly complex national value added tax, and reforming labour laws — to show that it can pull Asia's third-largest economy out of the doldrums.”

Industry members also praised the Indian government’s decision.

VK Vijayakumar of GEOJIT Financial Services in Mumbai, for example, likened the drop in corporate tax rates to the US’s New Deal back in the 1930s.

Vijayakumar said: “The measures announced by the FM this morning can be described as a 'New Deal' for the Indian economy. Reduction in corporate tax rate to 22% (25.17% effective rate) and for new manufacturing companies to 15% and reduction on MAT are big boost to investment. The psychological stimulus from this 'New Deal' will be higher than the fiscal stimulus. Animal spirits will respond positively. The message from Dalal Street is a clear signal. Bold move indeed!”

Furthermore, Jimeet Modi, who founded and heads Samco Securities & Stocknote in Mumbai, said this corporate tax cut would be a huge benefit to the local economy.

Modi said: “The reduction to 22% in corporate taxes will result in massive release of 1.45 trillion rupees immediately in the economy, which will boost sentiments and bring in real surplus to the corporates. Companies in consumer finance, banks, and hotels that pay upwards of 32% tax will have maximum benefits. However, rest of the sectors will have a nominal positive impact. This is a path-breaking move delivered by Modi 2.0 government in the interest of economy at the cost government exchequer in times of crises which will go down well in the history.”

While also praising the decision, Mohandas Pai of Aaring Capital in Bengaluru made it clear India’s tax administration needs to seek greater tax justice.

Pai said: “We need to see how tax administration will be changed to reduce or eliminate tax terrorism; tax targets has to be reduced! Tax disputes have to be reduced and 'tax justice' needs to be ensured: we need big reforms in this area too as was done today for tax rates! But doing away with exemptions will definitely reduce tax disputes! Overall, a great day for India.”

What are your thoughts on India’s corporate tax rate cuts?