Corporate tax cuts: Govt bites bullet to balance tax competitiveness, but will this attract India a major global investment hub
A nearly double-digit tax reduction in the effective tax rate, unmistakably, pegs India as one of the most competitive investment destinations not only across its Asian peers, but globally too.
At macro level, the outcome should help reset overall economic sentiments and provide the fillip to Make in India programme
Withdrawal of enhanced surcharge will provide massive relief to portfolio investors, domestic and foreign both
Majority of measures delivered over the weekend will promote capacity additions under the Make in India programme
If the pace of economic growth in the last two quarters is anything to go by, a fiscal stimulus was all but waiting in the wings. The government delivered on expected lines as it announced a set of tax cuts for corporates last week.
A nearly double-digit tax reduction in the effective tax rate, unmistakably, pegs India as one of the most competitive investment destinations not only across its Asian peers, but globally too. At the macro level, the outcome should help reset overall economic sentiments and provide the fillip to the ‘Make-in-India’ programme that holds tremendous potential for employment creation and sustained growth.
In hindsight, it is not only the timing and the enormity of the outcome but also the pace with which the executive decision has been implemented, that bodes well for the government as it embarks on the path to realising the ‘$5-trillion economy’ goal.
Effective immediately, the tax rate for domestic companies stands reduced to 25.17 percent (inclusive of reduced surcharge of 10 percent) irrespective of turnover thresholds and nature of activities, provided taxpayers do not opt for any tax incentives.
New manufacturing companies, i.e, those incorporated on or after October 2019, and commencing production before March 2023, are now subject to effective tax rate of 17.16 percent (inclusive of reduced surcharge of 10 percent). That these two sets of corporate taxpayers are further exempted from minimum alternate tax (MAT) levy, only sweetens the outcome.
In all other cases, MAT rate has been slashed lower than pre-2009 level (i.e, 15 percent) and that will provide relief to businesses continuing to benefit from tax holidays/special incentives. On the flip side, taxpayers must be careful about recognising accumulated tax credits (in the form of MAT previously paid) in cases where levy of MAT has now been done away with.
In another important measure, the government sought to roll back buy-back distribution tax levy for listed companies in cases where public announcements were made prior to the presentation of Union Budget 2019 (i.e, 5 July 2019). Such grandfathering must help in restoring investors’ confidence in the predictability of India’s tax policy.
Withdrawal of enhanced surcharge (of 25 percent and 37 percent) introduced in the Union Budget 2019 on capital gains arising on sale of equity shares liable for securities transaction tax (STT), will provide massive relief to portfolio investors, domestic and foreign both.
Majority of measures delivered over the weekend by Finance Minister Nirmala Sitharaman will promote capacity additions under the Make in India programme and create employment across sectors. The government’s move is also well-timed to hold out India as an ideal alternate destination for thriving global businesses, particularly manufacturing and supply chain-led, in the wake of the simmering trade tensions between the US and China.
Clearly, the government has bitten the bullet insofar as the balance of tax competitiveness and the burden of fiscal stimulus of this scale can have on macro-economic statistics; however, arguably, the goal is to position India as one of the most attractive countries from an investment standpoint, as the government sets the stage to propel India into becoming a $ 5-trillion economy.
(Singhania is Partner at Deloitte India and Agarwal, senior manager, Deloitte Touche Tohmatsu India LLP)
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