New Delhi: In a confidence building bonanza for the corporate sector, Finance Minister Nirmala Sitharaman on Friday slashed the corporate tax rate from 30% to 22% for domestic companies and 15% for those companies incorporated on or after October 1.
The announcement sent the Sensex into raptures with a record single-day spike of over 1800 points in a decade.
The FM hyped the bonanza as Rs 1.45 lakh crore stimulus for the economy. But though the corporate bottom lines would perk up, the government would have to forego that much in terms of taxes.
Of course, the government is doing this in the hope of reviving demand and sending out a message to investors on the eve of PM Modi’s Houston visit -- That India is now as attractive a destination as China.
At the same time, the government strategy is to expand the corporate tax base to recover some of the loss to the exchequer.The Opposition was quick to damn the government for the bounty to the corporate sector at a time when the common man is reeling under the impact of the economic slowdown, unemployment is at a new high, income levels are stagnating and there the consumer does not have the disposable income to drive demand.
The Opposition said the government is still refusing to accept that the problem is on the demand side as consumers are reluctant to buy everything from biscuits to car; also, it is sceptical whether the largesse will induce the companies to pass on the benefit in the form of reduced prices.
Still worse, the Congress said the Modi government was trying to drive the people into a debt trap by directing public sector banks to hold loan fairs; these loans will mostly go towards funding retail buyers, it is pointed out.
In the name of stabilising the flow of funds in the capital market, the Finance Minister also waived the surcharge she had slapped on capital gains accruing from sale of equity shares that was to be recovered from individuals, HUF and others.
The surcharge on capital gains from sale of any security, including derivatives in the hands of foreign portfolio investors (FPIs), has been also withdrawn.
Also dropped is tax on buy-back of shares from the companies which announced it before July 5.Over the years, the Modi government had brought down the statutory corporate tax rate from 35% to 30%, but nobody imagined Sitharaman would slash it a whopping 8% in a single stroke.
An official clarification says the new corporate tax of 22% is applicable only to domestic companies, "subject to condition that they will not avail of any exemption/incentives.
"The effective tax rate for these companies shall be actually 25.17% because of surcharge and cess, but a concession to them is that they shall not be required to pay Minimum Alternate Tax (MAT).
Nor will MAT be sought from any new domestic company incorporated on or after October 1 and those making fresh investment in manufacturing will be charges income-tax of just 15%, which is lower than the highest slab of tax on individuals.
These newly incorporate companies have to start production by March 31, 2023, with the same condition that they do not avail of any exemptions or incentives.
The effective tax rate for these companies shall be 17.01%, inclusive of surcharge and cess.As a financial analyst underlined, the immediate beneficiaries of the 22% corporate tax cut are private sector banks who don’t enjoy any tax exemptions and will straightaway add about 14% to their bottom line.
Though the officials put the effective new tax rate at 25.17%, it varies not only in different industries but also among the companies in the same sector.
Analysts say it will be 24.75% for the manufacturing companies; the effective tax rate is low in case of capital-intensive industries.The concessional rate of 15% corporate tax on new companies would have helped investments by the foreign companies, but that prospect is denied by the finance minister by repeatedly stressing that it applies only to the domestic companies.