India has cut the corporate tax rate on domestic companies as the Narendra Modi-led government looks to stimulate economic growth from a six-year low.
Tax on local companies will be cut to 22 percent from 30 percent if they don’t avail exemptions or incentives from the current financial year, Finance Minister Nirmala Sitharaman told reporters in Goa on Friday. The provisions effecting changes in the Income Tax Act,1961, will be made through an ordinance, she said.
The effective corporate tax rate for these companies would be 25.17 percent without having to pay the minimum alternate tax at 22 percent, the finance ministry said in a statement. The new tax rates would be applicable from April 1, and the reduced tax liability will be adjusted against future tax installments, Revenue Secretary Ajay Bhushan Pandey said.
The tax cut would cost the government Rs 1.45 lakh crore, Sitharaman said, adding that it would have to revise its corporate tax target of Rs 7.66 lakh crore. But economic buoyancy will generate revenue to make up for the loss, the finance minister said, referring to the impact on the fiscal deficit target of 3.3 percent for 2019-20.
Sitharaman, in her maiden budget in July, had lowered the corporate tax rate to 25 percent from 30 percent, excluding surcharge and cess, for companies with a turnover up to Rs 400 crore.
Friday’s announcement brings down the rates for all Indian companies.
Companies that don’t opt for the concessional tax and avail the current exemption will have to pay tax at the earlier rate. For such companies, the minimum alternate tax has been cut to 15 percent from 18.5 percent.
Companies that opt for the new tax rate after the expiry of tax incentives will not have the choice to subsequently withdraw it.
To attract investments in the manufacturing sector, new companies incorporated on or after Oct. 1, and start manufacturing by March 2023, will pay tax at 15 percent. The effective rate for them would be 17 percent, including surcharge and cess. These companies would also not have to pay the minimum alternate tax.
Measures To Boost Markets
To boost flow of funds in capital markets, enhanced surcharge introduced in this year’s budget will not apply on capital gains arising on sale of equity shares in a company for securities transaction tax, in the hands of an individual, Hindu Undivided Family, Association of Persons, Body of Individuals, and Artificial Juridical Person, according to the ministry statement.
The enhanced surcharge will also not apply to capital gains from sale of securities, including derivatives, by foreign portfolio investors. The relief was first announced in August.
Budget 2019-20 had proposed that listed companies would have to pay additional tax of 20 percent if they buy back shares, in line with unlisted companies. Sitharaman today announced that listed companies that have already made public announcements to buy back shares before July 5, are exempted from this tax. Many companies that announced buyback plans but were yet to implement it.
Widened Scope For CSR Spends
The government has expanded the scope of corporate social responsibity, Sitharaman said, and companies can spend the mandatory 2 percent of their expenditure on incubators funded by central or state governments.
These companies can also utilise their mandatory CSR spends on:
- Any agency or public sector undertaking of central or state governments.
- Public-funded universities, Indian Institutes of Technology, national laboratories and autonomous bodies engaged in conducting research in science, technology, engineering and medicine aimed at promoting sustainable development goals.
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