Nirmala Sitharaman addressing a Press conference after a review meeting in New Delhi.
Dubai - Cut in corporate tax a bold step, a stimulus that will augur well for existing and new businesses
Published: Sat 21 Sep 2019, 10:15 PM
Updated: Sun 22 Sep 2019, 8:13 PM
Indian Prime Minister Narendra Modi's government surprised domestic markets on Friday as Finance Minister Nirmala Seetharaman announced 'big bang' reforms to revive confidence in the flagging Indian economy by introducing a cut in corporate tax to 25 per cent from 30 per cent along with other measures.
The Sensex's spurt, closing at a historic high, only affirms that the economy has high appetite for more reforms to build a resilient economy.
Uday Kotak, head of Kotak Mahindra Bank, said on Twitter that reducing corporate tax rate to 25 per cent is "big bang reform... it signals that our government is committed to economic growth and supports legitimate tax abiding companies. A bold, progressive step forward."
Indian benchmark indices logged the biggest-ever gains in over 10 years. The Sensex advanced by 1,921.15 points to 38,014.62 while the Nifty jumped 570.65 to 11,275.45.
"The huge relief in corporate tax announced by Finance Minister Nirmala Sitharaman is real music to the ears, not only to the corporate world but for everyone doing business in India... let us hope that this deep tax cut will help spur growth and will be a fillip for the flagging economy. As the new corporate tax is one of the lowest in Asia, this will also help to increase the flow of FDI to India," said Dr Azad Moopen, founder chairman and managing director of Aster DM Healthcare.
The new reforms bring relief to domestic companies who will also not be required to pay any Minimum Alternate Tax. The effective tax rate in this case would be 25.17 per cent, including cess and surcharge.
Sitharaman announced an even lower 15 per cent corporate tax rate for new domestic companies making fresh investment in manufacturing. These companies should have commenced production on or before March 31, 2023, and would also get exemption from MAT.
She said that Taxation Laws (Amendment) Ordinance 2019 has already been prised to effect changes in the Income Tax Act and Finance Act of 2019.
A company that does not opt for concessional rate can continue to be charged at existing rate of corporate tax. Such companies can opt for concessional tax regime after expiry of tax holiday period or exemptions. But option once exercised cannot be withdrawn.
In order to provide relief to companies enjoying concessions and tax incentives, MAT has been brought down from 18.5 per cent to 15 per cent.
In another decision aimed at ensuring flow of funds in the capital market, the enhanced surcharge provided in Finance Act 2019 shall not apply to capital gains arising on sale of equity shares in a company or a unit of equity oriented business trust.
The enhanced surcharge shall also not apply on capital gains arising on sale of any securities, including derivatives in the hands of foreign portfolio investors.
The government has also provided relief to companies such as Infosys that announced a share buyback plan, before the new buyback tax was introduced in the budget. Sitharaman said that any listed entity that has already made a public announcement of a buy back before July 5, 2019 will not have to pay tax.
The government has also decided to expand the scope of the 2 per cent corporate social responsibility (CSR) fund that companies have to provide for identified activities. This amount can now also be spent on the incubator funded by the central or state government agency, or PSUs of central and state governments. The CSR funds can also be used for R&D activities of IITs and other autonomous bodies.
Sitharaman said that the announcements on corporate tax would result in total duty forgone to the tune of ?1.45 trillion a year. As the changes would be effective from this fiscal itself, it would have bearing in balance for a six month period. She said the revenue forgone would not add up to the pressure on revenue or adversely impact the deficit as these would help spur investment and 'Make in India' initiatives and in turn increase economic activity and revenues. "Economic buoyancy itself generates tax," she said.
Lulu Group International, which has investments close to $2 billion in India, is optimistic that these measures will encourage the businesses to expand their footprint.
Yusufali M.A., chairman of Lulu Group International, said: "The cut in corporate tax is a bold step, a stimulus that will augur well for existing and new businesses which are planning to start operations in India. The introduction of positive measures and reforms will make India more resilient and encourage foreign investors to invest heavily for the long-term period."
Kamal Vachani, group director of Al Maya Group and president of the Dubai chapter of Global Organisation of People of Indian Origin, said: "The new reforms are indeed a need of the hour and businesses both in India and abroad were concerned with global slowdown and its impact across the economies. The positive measures by the Modi goverment will pave way for more global companies to look at India as preferred investment destination."
Rizwan Sajan, founder and chairman of Danube Group, said: "The current reduction in corporate tax announced by the Indian government is an excellent step. In-fact it is a bold step that will boost the economy and it would certainly help put businesses back on track, generate more employment and keep India as the principal destination for investments."
He further added: "As many of us have investment in India this announcement will create deeper impact, instill more confidence amongst the businessmen like us. Overall, it is going to lead to an increased flow of investment in the nation, not just domestic but international too."
Dr Dhananjay Datar, chairman and managing director, Al Adil Trading, said: "It is evident that the Modi government is indeed taking strong measures to turn around the Indian economy which has been seeing downturn. The proposed reduction in corporate tax rates coupled with RBI's rate cuts should help to pare the economic downturn and boost business sentiments as lower tax rates will make India a more competitive investment destination."
Krishnan Ramachandran, CEO of Barjeel Geojit Financial Services, said: "Corporate India has received a major impetus by way a massive tax deduction. Income tax rates have been slashed from the prevailing 34.94 per cent to 25.1 per cent, giving a massive $20 billion cash rebate to companies at large. This proactive measure will lead higher earnings which in turn help in higher investments in capex, working capital, dividend payout and others. This move is being hailed as the mother of all reforms that businesses have seen from 1991 onwards and this has been aptly reflected in the equity markets."
"As part of the Make in India initiative and to promote more investments, new manufacturing companies being set up in India [for the given time frame] will qualify for a reduced tax of only 17.1 per cent. This move is likely to propel more investments from the UAE to India considering the low tax regime that they will be subject to. It is also widely speculated that this move will also bring in more multi national companies to invest into India."
Ramachandran is, however, cautious if whether these tax relief measures can revive consumers and business confidence and aid in overall GDP growth of the country, failing which the government will have a challenge in managing the fiscal deficit for the current year. - sandhya@khaleejtimes.com
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