- The move is in line with similar steps taken by the UK and US to battle the slowdown
- This may help India attract some good investments that are looking to shift out of China
- It is set to clean up the existing taxation web, which is full of surcharges, exemptions, and cesses
Finance minister Nirmala Sitharaman with an aim to lift business sentiment and spur investments slashed corporate tax rate – to 22% from 30% for domestic companies – and also proposed a 15% rate for new investment in the manufacturing sector. She offered a Rs 1.45 lakh crore fiscal boost in effect, also sending a strong signal that the government will take all steps needed to revive the growth.
In order to promote growth and investment, a new provision has been inserted in the Income Tax Act, with effect from the financial year 2019-20,” Nirmala Sitharaman told reporters ahead of the GST Council meeting on Friday.
Announcing the package, mainly termed as a mini-budget by several economy watchers, the Finance Minister said tax cuts had been carried out by promulgating an ordinance to amend the Income Tax Act.
The tax rate for the new manufacturing companies will be 15%, which with surcharge and cess will be 17.5%. The new regional company incorporated on or after October 1, 2019, that make fresh investment in manufacturing and initiating operations before 31 March 2023 will have the option to pay 15% tax sans any exemption.
This may help India attract some good investments that are looking to shift out of China following the country’s spat with the US and also bring back investment in sectors like textiles that have already moved to countries like Bangladesh.
New Delhi’s move is in line with similar steps taken by the UK and US to battle the slowdown and attract investments and brings its tax rates to among the lowest in South East Asia. The latest effective corporate tax (which includes a 10% surcharge and a 4% education cess) will be 25.17% as against 34.95% applicable on companies with a turnover of more than Rs 400 crore at the present time.
Nirmala Sitharaman’s announcement also signaled the government’s choice to clean up the existing taxation web, which is full of surcharges, exemptions and cesses. So, the existing companies that decide to do without the benefits of the exemptions can now get away by paying 22% corporation tax, with the effective rate working out to 25.17%.
Budget numbers have given figures that out of the over 8.3 lakh paying companies, around 41% or 3.45 lakh companies had an effective tax rate of over 25% during the financial year 2017-18. “The larger idea is to simplify and make the process rational. Exemptions will be progressively reduced,” Nirmala Sitharaman said.
THE FISCAL IMPACT
When asked about the revenue impact on this count on fiscal deficit, Sitharaman said that the government is not oblivious to the impact these measures and fall in the nominal GDP growth is likely to have.
“Yes. We are conscious of the impact. We will take all this on board to reconcile the numbers,” she said. Nominal GDP growth recorded a growth of 8% as against the budgeted 11% in the first quarter.
Tax collections were not keeping up with the estimated growth owing to the slowing economy. Transfer of a hefty sum of Rs 1.76 lakh crore as dividend and additional transfer from the RBI, which effectively translates to Rs 58,000 crore over the budgeted Rs 90,000 crore, is set to provide only a little help. Earlier, RBI had already transferred Rs 28,000 crore as dividend for last fiscal.