Markets jumped after a long slump, India Inc was delighted and experts gave a big thumbsup as the government on Friday launched a determined, and the biggest to date, bid to reverse the slowdown.
Finance minister Nirmala Sitharaman, aiming to lift business sentiment and spur investments, slashed corporate tax rate – to 22% from 30% for domestic companies – and proposed a competitive 15% rate for new investment in manufacturing. In effect, she offered a Rs 1.45 lakh crore fiscal boost, also sending a strong signal the government will take all steps needed to revive growth.
BSE benchmark Sensex notched up its biggest singleday gain in a decade, as sentiment boost and potential impact on investments overshadowed fiscal concerns. Companies, however, will be eligible for the new tax rate only if they forego incentives and exemptions in force. But even for those opting for the status quo, the minimum alternate tax (MAT) was cut to 15% from 18.5%.
Companies will have the option of lower tax rate after expiry of tax holidays and concessions they are availing now. Once they choose the new tax rate, they can’t go back to a concessional regime.
Prime Minister Narendra Modi termed the step to cut corporate tax rate “historic”, saying it “will give a great stimulus to Make in India, attract private investment from across the globe… create more jobs”.
Industry said these measures will awaken animal spirits in the economy that saw growth drop to a six-year low of 5% in April-June quarter.
Over the last month, the government has announced a number of measures to lift growth and revive sentiments, as criticism mounted amid job losses and falling demand.
Announcing the package, termed as a mini-budget by economy watchers, Sitharaman said tax cuts had been carried out by promulgating an ordinance to amend the Income Tax Act, bringing the tax rates on a par with competing Asian peers.
New Delhi's move is in line with similar steps taken by the US and UK to battle the slowdown and attract investments and brings its tax rates to among the lowest in South East Asia. The effective corporate tax (including 10% surcharge and 4% education cess) will be 25.17% against 34.95% applicable on companies with turnover of more than Rs 400 crore at present.
“In order to promote growth and investment, a new provision has been inserted in the Income Tax Act, with effect from financial year 2019-20,” Sitharaman told reporters ahead of the Goods and Services Tax Council meeting here on Friday.
The finance minister said her ministry is in consultation with the commerce and industry ministry on review of import tariffs.
“These are definitely very bold and welcome measures,” RBI governor Shaktikanta Das said at a function. “These tax rates take us closer to the tax rates which prevail in this part of the world.”
Tax rate for new manufacturing companies will be 15%, which with surcharge and cess will work out to 17.5%. Any new domestic company incorporated on or after October 1, 2019, making fresh investment in manufacturing and initiating operations before March 31, 2023 will have the option to pay 15% tax sans any exemption or tax holiday.
This may help India attract some investments that are looking to shift out of China following the country’s spat with the US and also bring back investment in sectors like textiles that had moved to countries like Bangladesh.
India is seen as one of the beneficiaries of the trade dispute, but so far east-Asian countries such as Vietnam have been big gainers.
“For a long time now, India has been saddled with the dubious tag of one of the highest corporate tax rate countries including the dividend distribution tax levy. With this measure, overnight, India has become an attractive investment destination as the after tax return on investment in India will see a significant increase,” said Sudhir Kapadia, national tax leader, EY. Buyback of shares that had been announced before July 5, 2019 by listed companies would not face the 20% tax imposed in the budget this year. The ordinance also effected the withdrawal of the increased surcharge (in the budget) on capital gains in sale of equity or an equity oriented fund or a unit of a business trust for domestic as well as foreign portfolio investors and derivative investments for FPIs.
The government also made government-funded incubators eligible for 2% corporate social responsibility spend, a key demand of the startup community.
“The announcements in the last few weeks clearly demonstrate that our government is leaving no stone unturned to make India a better place to do business, improve opportunities for all sections of society and increase prosperity to make India a $5 trillion economy,” said Modi, who leaves for the US, which cut corporate tax rate to 21% from 35% effective January 2018.
Economists say the move would boost business sentiment but will be visible with some lag in investments. “We expect today’s announcement to provide a big boost to business sentiment in the immediate term, with a modest knock on impact on consumption demand, particularly for big-ticket items. However, the impact on fresh investment activity may be visible with a lag,” said Aditi Nayar, vice president, ICRA. She expects the RBI to complement the measures with a 25 bps rate cut in the upcoming MPC review.
Tax experts expressed hope that the government would follow up the move with cuts in tax outgo for individuals. “Hopefully, this should be followed by a similar tax rate reduction for individuals and other taxpayers soon as the festive season approaches. This would leave more money in the hands of the taxpayers, which in turn would boost overall demand and consumption in the economy,” said Vikas Vasal, national leader-tax, Grant Thornton.
FISCAL IMPACT
Asked about the impact of revenue forgone on this count on fiscal deficit, Sitharaman said the government is not oblivious to the impact these measures and fall in nominal GDP growth would have.
“Yes. We are conscious of the impact.... We will take all this on board to reconcile the numbers,” she said. Nominal GDP growth in the first quarter recorded a growth of 8% as against the budgeted 11%.
Tax collections have not been in keeping with the estimated growth owing to the slowing economy. Transfer of Rs 1.76 lakh crore as dividend and additional transfer from the RBI, which effectively translates to Rs 58,000 crore over the budgeted Rs 90,000 crore, is expected to provide only a little help. RBI had transferred Rs 28,000 crore as dividend for last fiscal.
Rating agency Moody’s said the decision would be credit positive for India.
“The government of India’s (Baa2 stable) decision to reduce base corporation tax to 22% from 30% will boost net income of Indian corporates and is credit positive,” said Vikas Halan, senior vice president, corporate finance group, Moody’s Investors Service.
Halan said extent of final impact on credit profiles of Indian corporates will depend on whether they utilise the surplus earnings for reinvestment in business, debt reduction or high shareholder returns.
Published On : 21-09-2019
Source : Economic Times
