Finance minister Nirmala Sitharaman’s announcement on 20th September to reduce the basic corporate-tax rates to 22% for all domestic companies without tax exemptions or incentives and 15% for new manufacturing companies is a bold move. It is, indeed, the most significant corporate tax reform after the Goods and Services Tax (GST).
The option of a 17.01% effective tax rate for new domestic companies incorporated after October 1, 2019, making fresh investments in manufacturing and commencing operations by March 31, 2023, is one of the most competitive tax rates in the world.
Corporate Tax forms the major chunk of total government revenue. This move shall cost the government exchequer whooping Rs. 1.45 lakh crore. But nonetheless, it shall improve the balance sheet of Indian Corporates. It is now up to the Indian Captains of the business world to revive the industry through capital flows. Also, the flow of foreign funds into the Indian economy is expected once the Indian Taxation Rates proves to be most cost-efficient in the South East Asian subcontinent. India is now much better than China in terms of tax rate, transparency, and tax administration. So, MNCs can now look at India for setting up new units.
One more benefit gifted by FM is the abolition of MAT Provisions to the company adopting the reduced rates. It has been clarified that now, MAT is applicable only to those companies who are not adopting section 115BAA (Tax rate of 22%) and section 115BAB (Tax rate of 15% for manufacturing companies).
This booster shot was the need of the hour keeping in view the sluggish movement of Indian Economy. However, the government will need to aggressively target disinvestment to fund the fiscal deficit.
Also, the reduction in Corporate Tax could motivate to increase spending on salaries which in turn shall lead to an increase in consumption. Thus the cascading effect of these measures would be clearly visible in the next 10 years for sure.
Needless to mention that the number of Corporate Assessees shall increase in near future due to fresh investments or through foreign fund flows. This shall widen the tax base which is a key motto. FM has also promised that the Government shall not reduce its spending post this tax cut.
I earnestly believe that reduction in Corporate Tax rate shall push up economic activity and increase revenue in the coming years on one hand, and increase the CAPEX / consumption on part of Corporates and Individuals on the other.
Last but not the least the companies shall have to exercise the option to avail concessional rate before the due date of filling of income tax return. Once availed this scheme, cannot be withdrawn in the near future.
The author can be contacted at rnath@rnaca.com