Finance Minister announces tax bonanza for corporates, exchequer to take ₹1.45L cr hit

In a major bonanza for corporates as part of measures to promote growth and investment, Finance Minister Nirmala Sitharaman on Friday announced to slash corporate tax rate to 22 per cent for domestic companies and 15 per cent for new domestic manufacturing companies, besides other fiscal reliefs.

While the capital market responded immediately and the Sensex jumped a thousand points, sceptics were also quick to doubt the efficacy of such knee-jerk policy decisions. The Finance Minister, they pointed out, had made the announcement after dragging the economy to the brink and with this announcement, has made a mockery of her own budget proposals made barely five months ago.

There are also doubts about how the hit would affect the Government’s fiscal deficit. And more blunt messages on social media wondered how rural demand will be boosted by giving corporates more tax cuts. Critics also pointed out that it was time for Indian corporate bodies to stop whining, put its act together and learn to compete globally, rather than expect the public to bail them out.

Capitalism should not mean just making profits but also sustaining losses.

Congress leader Jairam Ramesh tweeted, “A headline-itis afflicted, panic-stricken Modi Sarkar has cut corporate tax rates less than 3 months after a Budget and 4 months before the next one. This is welcome but it is doubtful whether investment will revive. This does nothing to dispel fear that pervades in India Inc”.

Another Twitter user and commentator Sandip Ghosh, a BJP and Modi supporter and a corporate executive, reacted by saying, “ No one will look a tax-cut horse in the mouth. But, the way the government is going about in fits and starts will leave businessmen and investors flummoxed. What happens to fiscal deficit now. Need a holistic policy announcement for clarity and confidence”

Yet another reaction summed up the criticism, “ By reducing the Corporate tax rates, will rural distress be alleviated? Guess not. Would demand surge? Guess not. Will manufacturing improve? Will exports shoot up? Above all, will jobs be generated? And if there are no profits, this reduction benefits no one.

Meanwhile IANS reported :

The effective tax rate for these companies would now be 25.17 per cent, inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax (MAT).

The total revenue foregone for the reduction in corporate tax rate and other relief is estimated at ₹1,45,000 crore. This is the biggest announcement so far by the Modi 2.0 government to fight the slowdown, which dragged down the GDP growth to a six-year low of 5 per cent in the April-June quarter of the current fiscal.

The government has brought in the Taxation Laws (Amendment) Ordinance 2019 to effect lower tax for corporates.

A company, which does not opt for the concessional tax regime and avails the tax exemptions, would continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period.

"After the exercise of the option they shall be liable to pay tax at the rate of 22 per cent and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5 per cent to 15 per cent," a Finance Ministry statement said.

In order to stabilise the flow of funds into the capital market, the government has said that the enhanced surcharge introduced by the Finance (No.2) Act, 2019 will not apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax.

"The enhanced surcharge shall also not apply to capital gains arising on sale of any security, including derivatives, in the hands of Foreign Portfolio Investors (FPIs). In order to provide relief to listed companies, which have already made a public announcement of buy-back before July 5, 2019, it is provided that tax on a buy-back of shares in case of such companies shall not be charged," the statement said.

The sharp tax rate cut has been announced even as revenue collection on account of both direct and indirect taxes are far below expectations.