FM unveils $20b tax booster for India Inc; D-Street sees biggest rally in a decade
Finance Minister Nirmala Sitharaman proposed to slash corpoprate tax for domestic companies.
Sitharaman said the revenue foregone on reduction in corporate tax and other relief measures will be Rs 1.45 lakh crore annually, which means a $20 billion booster to an economy that grew at the slowest pace in six year in June quarter.
The announcements came in the fourth round of a series of measures that the government has announced over the past month, trying to pump-prime the economy, which has been witnessing a major slowdown in growth that plunged to a six-year low of 5 per cent in June quarter.
The FM said a new provision has been inserted into the Income-Tax Act to enable these measures and the new tax structure will be effective from April 1, 2019.
Accordingly, a domestic company can opt for paying income-tax at 22 per cent subject to the condition that it does not avail any other tax incentive or exemptions. The effective corporate tax rate for them will be 25.17 per cent, including surcharges and cess against the current base rate of 30 per cent.
Any new domestic company incorporated on or after Oct 1, 2019 and making fresh investment in manufacturing will have the option of paying an income-tax at 15 per cent. The rate of Minimum Alternative Tax (MAT) has been reduced from 18.5 per cent to 15 per cent.
- FM proposes to slash corporate tax for domestic companies
- Lower corp tax only if no exemption availed
- Effective tax rate will now be 25.17, including surcharge and cess
- Effective tax rate for new manufacturing companies at 17.01%
Analysts termed it a mini-Budget.
"It's not just bigger than the Budget, this is bigger than last 20 Budgets," said Samir Arora of Singapore-based Helois Capital.
“Domestic companies now have the option of paying income-tax at 22 per cent subject to the condition they do not avail any other tax incentive," Sitharaman said. The FM said companies opting for the 22 per cent income-tax slab won’t have to pay minimum alternative tax.
Dalal Street turned euphoric and benchmark equity indices Sensex and Nifty recorded the biggest intra-day gains in a decade at 4 per cent, with the former rising over 1,800 points and Nifty 450 points.
“The announcement is a big positive for corporate India,” said AK Prabhakar, Head of Research, IDBI Capital Market. He said Larsen & Toubro, Maruti Suzuki, Mahindra & Mahindra, Kotak Mahindra Bank, ICICI Bank, HDFC Bank, HUL, Dabur, HDFC, Baja Auto, Hero MotoCorp, Colgate Palmolive, UltraTech and BEL are few high tax-paying companies, whose stocks may see huge short covering
Sitharaman said the objective is to provide relief to companies that continue to avail exemptions and incentives, the Finance Minister said. The measures will be implemented through an ordinance, she said.
The new corporate tax rate will be among the lowest in Southeast Asia. The measures are aimed at boosting the government's 'Make in India' initiative.
“The government has taken a bold and proactive step to bring the much-needed tax reforms, which will boost investment and also aid to private cycle capex. The lowering of corporate tax rates will widen the tax net and gradually bring in more revenues to the government. Overall, the move will make Indian companies globally competitive, a welcome step to arrest slowdown and lift up the market sentiments,” said Sanjeev Hota, Head of Research, Sharekhan.
The FM also said domestic companies would be allowed to spend the 2 per cent mandatory CSR fund in government-sponsored incubators. This will help boost the startup environment. The announcements came hours before the GST Council meeting, which is expected to take up a proposal for review of tax levies on cars, consumer goods and hotels and a few other items.
The FM also reiterated an earlier announcement that there will be no enhanced surcharge on capital gain from equity for FPIs. In order to stabilise funds flow in capital market, the FM said the enhanced surcharge introduced in Budget 2019 shall not apply on capital gains arising on sale of equity shares in a company or a unit of an equity-oriented gund, or a unit of business trust fund liable to STT in HUF, AOP, BOI or AJP. The enhanced surcharge shall also not apply to capital gains arising on any security including derivatives in the hands of FPIs.
She clarified that there will be no tax on buyback of shares in case of companies, which have made public announcements of buyback before July 5, 2019.