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ET View: Corporate tax rate cut, the best reform so far

A lower rate, comparable with Asian peers, and sans any exemptions, will make large Indian cos more competitive.

ET Bureau|
Updated: Sep 20, 2019, 10.30 PM IST
Markets have understandably surged after the government’s bold reform to slash corporate tax rate for domestic companies to 22% from 30%, and even lower to 15% for new manufacturing companies that will be incorporated on or after 1st October 2019. A lower rate --comparable with Asian peers -- and sans any exemptions, will make large Indian companies far more competitive, leave them with more cash for investment and expansion and persuade them to stay in India.

With the debate raging over structural problems in the Indian economy, the direct tax reform will help companies improve their valuations the medium term. That could drive the sentiment in the stock market in a more sustainable way. The effective tax rate including the dividend distribution tax of some large companies now is as high as 48%. It will drop to around 40%, and that’s a relief.

A reduction in the minimum alternate tax (MAT), introduced in 1996-97 to bring zero tax companies under the net, is welcome.

The total effective tax rate including additional levies will now be at 25.17% for companies that pay a statutory corporate tax of 22%. Ideally, levies such as surcharges should have been scrapped, but the Centre may have wanted to protect its revenues. Surcharges, the proceeds of which go only to the Centre, must eventually be scrapped.

Exemptions will go for any company that settles for the lower corporate tax rate. This makes eminent sense, given that exemptions are a drag on the exchequer and distort the tax system. Clearing up the thicket of concessions will also level the taxation playing field between large and small companies.

The effective tax rate for new companies, with the same caveat that they don’t avail of any exemptions, will be around 17.01%, bringing it to the same level as Singapore. The idea is to boost manufacturing. However, one needs to watch out how the implementation pans out, given that corporates have also given the option to pay the existing tax rate if they want exemptions to continue.

A lower capital gains tax on listed equities will make it attractive for individuals, local trusts and HuF to invest in the stock market, to counter the capital outflows.

The worries over the huge revenue loss—estimated at around Rs 1,45,000 crore—may be slightly misplaced. The goods and services tax, that will stabilise in the medium term, will widen the tax base for corporate tax, as more and more companies come into the indirect tax net and declare their true extent of production. A larger base coupled with the lower rates should boost collections.

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