Corporate income tax
- September 21, 2019
- Posted by: InsightsIAS
- Category: INSIGHTS
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Corporate income tax
What to study?
For Prelims: What is Corporation tax? Key changes announced.
For Mains: Need for and significance of these decisions, challenges ahead and ways to address them.
Context: Finance Minister Nirmala Sitharaman has announced major changes in corporate income tax rates to revive growth in the broader economy. This has been achieved through an ordinance– the Taxation Laws (Amendment) Ordinance 2019.
What has the government done?
- Corporate tax rate to be 22 per cent without exemptions.
- No Minimum Alternate Tax (MAT) applicable on such companies.
- Effective corporate tax rate after surcharge and cess to be 25.17 percent.
- To attract investment in manufacturing, local companies incorporated after October 2019 and till March 2023, will pay tax at 15 percent.
- That effective tax for new companies shall be 17.01 percent, including cess and surcharge. Companies enjoying tax holidays would be able to avail concessional rates post the exemption period.
- Will give MAT relief for those opting to continue paying surcharge and cess. MAT has been reduced to 15 percent from 18.5 percent for companies who continue to avail exemptions and incentives.
- To stabilise flow of funds into the market the enhanced surcharge announced in Budget 2019 will not apply on capital gains arising on sale of any security, including derivatives by foreign portfolio investors (FPI).
- For listed companies which made announcement for public buyback before July 2019 it is provided that tax on buyback on shares of such companies will not be charged.
The new corporate income tax rates in India will be lower than USA (27 percent), Japan (30.62 percent), Brazil (34 percent), Germany (30 percent) and is similar to China (25 percent) and Korea (25 percent).
New companies in India with an effective tax rate of 17 percent is equivalent what corporates pay in Singapore (17 percent).
Need for and significance of the latest move:
The goal is to turn India into an investors’ darling, demonstrate the government’s intent to walk the talk on economic management, restore investors’ confidence and boost sentiments and demand.
- Alter the profitability dynamic of the Indian corporate ecosystem.
- Given the substantially lower rates would imply that many corporates will break even much ahead than what would have been the case with the earlier rates.
- Lower taxes should, ideally, result is higher profit margins. This should bolster their books, and some of these companies should be able to pass on the higher margins in the form of lower product prices to consumers.
- Lower corporate income tax rates and the resultant change in profitability will likely prompt companies to invest more, raising their capital expenditure (capex).
- Additional capacities will, eventually, through a secondary round effect, prompt these companies to hire more employees.
Why has the government brought an ordinance to bring in these changes?
Changes in income tax rates (both corporate and individual) require legislative amendments. These require Parliamentary ratification. When the Parliament is not in session, the government can bring these changes through an Ordinance and later bring a Bill when Parliament convenes.
Concerns over the rate cut?
- The revenue foregone for the government because of the latest corporate income tax cuts will be to the tune of Rs 1.45 lakh crore a year.
- This has triggered concerns of fiscal slippage, given that tax collections have been far below the budgeted estimates.
- The government has set a fiscal deficit target of 3.3 percent of GDP for 2019-20. Lower tax revenues could upset the fiscal math.
How will the corporate tax cuts be funded?
The government may fund part of the revenue foregone because of corporate tax cuts through the additional transfer of dividends and surplus from the Reserve Bank of India (RBI).