Huge cut in corporate tax to fire up economy

New Delhi: The Modi 2.0 government on Friday announced a Rs 1.45 lakh crore fiscal stimulus that includes slashing corporate tax to 22 per cent from 30 per cent now, cutting down MAT and lowering tax to 15 per cent for companies putting fresh capital into manufacturing.

The Union government has made huge tax concession in spite of lower-than-expected revenue mop-up, thus inviting charge of "crony capitalism" from political rivals.

The announcement sent shares soaring more than five percent in Mumbai -- the biggest jump in 10 years -- while the rupee firmed up against the dollar. The reduced corporate tax rate of 22 per cent would apply on domestic entities that do not avail any exemptions and incentives.

Also, these companies will not be required to pay any Minimum Alternate Tax (MAT). Effective tax rate in this case would be 25.17 per cent, including cess and surcharge.

"A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall 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," a Union Finance Ministry statement said.

Companies making fresh investment in manufacturing would get to pay lower tax of 15 per cent provided they are incorporated on or after October 1, 2019.

"This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before March 31, 2023," the ministry said.

Tax experts said that the reduction in corporate tax would benefit large companies such as Reliance, Tata, Vedanta, Adani more than medium-sized firms.

Companies with annual turnover of up to Rs 400 crore already pays lower tax rate of 25 per cent and account for 99.3 per cent of India Inc.

The effective tax rate for companies after Friday's rate cut would be 25.17 per cent inclusive of surcharge and cess.

In order to boost market sentiment which has been depressed for months now, the government has also said that enhanced surcharge will not apply to capital gains arising on sale of any security including derivatives in the hands of Foreign Portfolio Investors (FPIs).

Further, tax will not be levied on buyback of shares of listed companies if they made such offer before July 5, 2019.

Making the announcements at her fourth press conference on measures to boost the economy, Union Finance Minister Nirmala Sitharaman said the enhanced surcharge shall not apply on capital gains arising from sale of shares in a company or a unit of an equity-oriented fund or a unit of a business trust liable to securities transaction tax (STT).

The government has offered the biggest ever tax bonanza in the past few years by amending the Income Tax Act 1961 through Taxation Laws (Amendment) Ordinance 2019.

On account of tax concessions, the government will forego revenue of about Rs 1,45,000 crore in a year. The tax measures are being considered really bold given that revenue collection of both direct and indirect taxes have been lower than expected in the budget.

In order to boost the economy, the government has already come out with three set of measures with the Friday announcement being the fourth and the biggest one.

The move came hours before Prime Minister Narendra Modi would fly to the US where, apart from other engagements, he will meet the CEOs of top companies.