On Friday, Finance Minister Nirmala Sitharaman announced a slew of measures (1) to boost the economy and remove the hold of gloom from financial markets by cutting the corporate tax rate for domestic companies to an effective 25.2%. This announcement came just a day after the stock indices registered a fall and corporate czars were starting to speak up about the management of the economic crisis.
However, Friday’s announcements did provide relief and got the FM all-around applause from India Inc which welcomed the move to cut corporate taxes, limit minimum alternate tax, provide exemptions to FPIs on capital gains, among other measures.
The Indian economy hasn’t been in the best of its health if recent data is anything to go by. The economy fell to 5% quarterly growth in the latest GDP imprint which raised concerns about the long-term potential of the country’s growth story and achievement of the famed $5 trillion target as set by the government for the next five years. Meanwhile, the auto sector has been in distress with reports of inventory pileup and factories downing shutters making it to the newspapers almost every day. The demand for consumer durables is also seen to be crashing and this had led to a situation of gloom in the markets and the larger business community.
Over the last four weeks, FM has addressed the press almost every week and announced a new set of measures to boost the sentiments. But it was on Friday, that the industry finally let go of its aspersions and cheered the government for putting India on par with advanced economies such as the USA where corporate tax rates are lower .
So, what are these measures and how are they going to help the economy? Let’s take a look.
1.Corporate tax cut: Over the last decade, the corporate tax rate in India had come down from 35% to 30% but it was still seen as too high for a fast developing economy that wants to attract investments and support the industry. However, companies in India pay tax rates at very different rates owing to a myriad of exemptions available to industry based on their line of business and size, among other things.
The government has cut the tax rate to 22% which will be an effective rate of 25.2% after considering the necessary surcharges and levies. However, the relief won’t be uniform across industries as some sectors (like banks) don’t have any exemptions which will now see a big boost in their profitability.
The tax cut is likely to push stock markets up and deliver big gains to the investors. Mutual funds are one of the better ways to protect wealth by diversifying asset classes. You can use log on to Finserv MARKETS to find the perfect mutual fund that’s fit for your investment needs and enjoy high returns in a transparent investing environment.
2.Make In India push: The government has also responded to the industry’s demands on incentivizing new manufacturing companies. Now, companies incorporated after October 1, 2019, which start manufacturing before 2023 will have an option to pay income-tax at the rate of 15%. The effective tax rate for these companies will be only 17.01% and they won’t be required to pay Minimum Alternate Tax.
3.Minimum Alternate Tax: The companies which are availing tax holiday right now can choose to pay lower taxes when their exemptions expire. These companies pay Minimum Alternate Tax which has been cut from existing 18.5% to 15%.
4.Relief to FPIs: The government has also clarified that enhanced surcharge introduced by the Finance Act, 2019 will not apply to capital gains arising on sale of any security including derivatives for Foreign Portfolio Investors.
5.Buy-back relief: The government has also said that any company which has announced the buy-back of its shares before July 2019 will not have to pay tax on the transactions.
6.Expanding CSR: The government has also sought to expand the definition of the mandatory 2% CSR requirement. These funds can now be spent on incubators funded by the government or any public agency. These funds can also be used to contribute to public universities, IITs, National Laboratories and Autonomous Bodies (established under ICAR, ICMR, CSIR, DAE, DRDO etc) engaged in research in science and technology.
The total fiscal outgo from these measures is pegged at Rs 1,45,000 crore which is likely to create some trouble for the government’s fiscal deficit target which seems to have been already breached. However, if the measures manage to boost the economic growth back to the expected 7-8% levels, the FM will be able to breathe easy – if only for a while.
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