#6 Key Takeaways From The Corporate Tax Rate Cut

It is early Diwali for domestic firms as Finance Minister Nirmala Sitharaman decides to slash the corporate tax rate to 22 per cent, applicable starting the current fiscal
#6 Key Takeaways From The Corporate Tax Rate Cut
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In a bid to promote growth and investment, the Centre on Friday reduced the basic corporate tax rate from 30 per cent to 22 per cent for domestic companies. Making the announcement, finance minister Nirmala Sitharaman said the new tax rates will be applicable from the current fiscal.

Experts are saying that this reform puts India's tax rates on par with other countries and will bring in more investments in India that will help boost the sluggish economy. “The demand for lowering the corporate tax rates has been there for years—soon after developed countries like US and UK reduced their tax rates. India, with effective corporate tax rate of about 35% coupled with dividend distribution tax rate of about 20% was becoming uncompetitive as return on investment was low. The Indian government has responded very well to this demand. We should see higher investment flows coming into India as net return to investors will be very attractive now,” says Neeru Ahuja, Partner, Deloitte India.

Sitharaman added that the government will forego revenue of INR 1.45 lakh crore annually due to reduction in corporate tax and other reliefs.

The markets jumped immediately after the announcement with the benchmark Sensex rising over 1,800 points and the Nifty crossing 11,000 mark at the time of filing this story. The announcements come at a time when the India’s gross domestic product growth for the first three months of FY20 is a six-year low of 5% and consumption slowdown has gripped sectors such as automobiles and FMCG, among others.

Here are the key highlights:

  • Effective corporate rate after including cess and surcharge will be 25.17 per cent.
  • For new manufacturing companies registered after October 1, 2019, the tax rate is even lower at 15 per cent. Effective rate after including cess and surcharge will be 17.01 per cent.
  • Companies can avail the new tax rates beginning the current fiscal year provided they have not availed of any incentives or exemptions.
  • Companies who have availed tax exemption/incentives can opt for the new rates after their tax exemption period has expired.
  • Surcharge introduced in the Budget on capital gains from sale of equity shares in a company liable for STT will not be levied.
  • Listed companies that have announced buyback of shares prior to July 5 will not be charged with super rich tax.

What the industry experts are saying

Market experts have welcomed the move by the government. Uday Kotak, managing director and chairman, Kotak Mahindra Bank called the move a “big bang reform” in a tweet: “Reducing corporate tax rate to 25% is big bang reform. Allows Indian companies to compete with lower tax jurisdiction like the US.”

Frank D'Souza Partner and Leader, Corporate and International Tax, PwC India says, “changes in CSR contributions and the relief on buy-back tax will address past concerns and help in chanelling funds towards R&D initiatives.”

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