The government today reduced the income tax rate for companies by almost 10 percentage points to 25.17 per cent and offered a lower rate of 17.01 per cent for new manufacturing firms to boost economic growth from a six-year low.
Finance Minister Nirmala Sitharaman said the reduction in tax rates has been done through an ordinance to an amendment to the Income Tax Act.
"In order to promote growth and investment, a new provision has been inserted in the Income Tax Act, with effect from financial year 2020. It will allow any domestic company an option to pay income tax at 22 per cent subject to the condition that they will not avail any exemption or incentives," she told reporters in Goa.
After considering surcharges and cess, the effective tax rate will be 25.17 per cent. This compares to 30 per cent corporate tax rate currently, and an effective tax rate of 34.94 per cent.
"To attract fresh investment in manufacturing and boost Make In India, new provision has been inserted in the I-T Act, which allows any new domestic company incorporated on or after October 1, 2019, making fresh investment in manufacturing, and starts operations before March 31, 2023, an option to pay income tax at 15 per cent," Ms Sitharaman said.
The effective rate for new companies would come to 17.01 per cent after considering surcharges and cess subject to the condition that they do not avail any other tax incentive or concession such as tax holidays enjoyed by units in special economic zones (SEZ) or accelerated depreciation. This compares to the current base rate of 25 per cent for new companies and an effective tax rate of 29.12 per cent.
Also, the companies will not have to pay minimum alternate tax (MAT). The Finance Minister said any company that do not opt for concessional tax regime and avails tax exemptions or incentives will continue to pay tax at pre-amended rates.
"These companies can opt for concessional tax regime after the expiry of tax holiday or exemption," she said.
To provide relief to firm that continue to avail exemptions and incentives, the rate of MAT has been reduced from existing 18.5 per cent to 15 per cent. Also, the super-rich tax introduced in Ms Sitharaman's Union Budget on July 5 by way of a higher surcharge on income, will not apply on capital gains on sale of equity shares in a company or business that is liable to pay securities transaction tax (STT).
The enhanced surcharge will not apply to capital gains arising on sale of any security, including derivatives in the hands of foreign portfolio investors, Ms Sitharaman said.
To provide relief to listed companies which have already made a public announcement of buyback of shares before July 5, 2019, tax on such buyback shall not be charged. The tax cut will cost the government Rs 1.45 lakh crore annually.
Ms Sitharaman, however, sidestepped questions on the impact the concessions will have on the fiscal deficit target, saying that the government was conscious of the reality and will reconcile numbers.
India's gross domestic product (GDP) growth slowed for the fifth consecutive quarter in April-June 2019 to 5 per cent, the lowest in six years. This was on the back of faltering domestic demand, with both private consumption and investment proving lackluster.
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