This Article is From Sep 20, 2019

5 Key Effects On Businesses After Government's Big Move On Corporate Tax

The government will bear a massive Rs 1.45 lakh crore per year to support its move to reduce corporate tax.

Corporate tax cut: Nirmala Sitharaman's announcement shows the centre want to boost manufacturing

New Delhi: The centre's move today to reduce corporate tax on domestic companies had an immediate effect on the markets, with the S&P BSE Sensex surging over 2,100 points and the NSE Nifty climbing above the 11,250 mark, after days of volatile trading. The effective tax rate has been reduced from 35 per cent to 25.2 per cent, which includes all surcharges and is applicable on companies that aren't availing any incentives, Finance Minister Nirmala Sitharaman said at a press briefing in Goa today. If calculated without the charges, the tax rate cut works out to 22 per cent from 30 per cent. Domestic firms incorporated on or after October 1, 2019 that want to make fresh investment in manufacturing will have an option to pay income tax at 15 per cent, she said. The new tax structure is effective from April 1, 2019.

Here are five key points on what the announcement means:

  1. The government will bear a massive Rs 1.45 lakh crore per year to support its move to reduce corporate tax. While domestic companies have a lot to cheer about, the Finance Minister said she is "conscious" of the effect the announcement would have on India's fiscal deficit target. "We are conscious of the impact all this will have on our fiscal deficit," said Ms Sitharaman, who has targeted to narrow the budget gap to 3.3 per cent of the GDP this year. A fiscal deficit is a shortfall in the government's income compared with its spending. However, the corporate tax cut may be seen as balancing out the Rs 1.25 lakh crore that the government received from the Reserve Bank of India (RBI). So the centre's move may be almost fiscal neutral. Also, if the stake sales of state-run companies go through, the mop-up is likely to be decent.

  2. The higher surcharge on the 'super rich' announced in the Union Budget this year will not apply on capital gains on sale of equity shares in a company that is liable to pay securities transaction tax (STT). This is one of the reasons why the markets bounced back today as investors saw an opportunity in savings on sale of equity shares. However, sovereign bonds slumped as fiscal concerns came sharply back to the fore. The move to reduce corporate tax is likely to put pressure on the government's sources of funds.

  3. The centre's move to reduce corporate tax puts India on par with other Asian nations. Domestic companies whose supply chain has been disrupted after getting caught in the protracted trade war between the US and China are likely to consider increasing their investment in India since the risk of high tax eating into their earnings is low now.

  4. The lower tax rate of 15 per cent for domestic firms incorporated on or after October 1, 2019 that want to make fresh investments in manufacturing will ease the pain in this key sector, which is one of the highest contributors to the Gross Domestic Product (GDP). Economic growth slowed to a six-year low of 5 per cent in the quarter ended June. The auto sector has been hit by several storms, from credit freeze for customers to falling demand.

  5. The new companies interested in investing on manufacturing won't have to pay minimum alternate tax (MAT), the Finance Minister said. MAT targets "zero-tax companies" that do not pay any tax due to concessions and incentives despite having earned substantial profits and paid high dividends. This will ease a big concern of companies, similar to the one they had when the centre imposed Rs 40,000 crore MAT on foreign institutional investors in 2015, when Arun Jaitley was Finance Minister, for capital gains made during previous years. MAT has been reduced to 15 per cent from 18.5 per cent for companies that continue to avail exemptions and incentives.