The government has slashed the basic corporate tax rate for companies that do not seek exemptions to 22% from 30% while for new manufacturing companies it has been cut down to 15% from 25%. Key Details

  • Govt has proposed to slash the corporate tax rate for domestic tax rate regarding which an ordinance has already been passed.
  • A domestic company can pay income tax at 22% if they don't seek an exemption or incentives.
  • Effective Tax Rate will be 17% inclusive of all surcharges and cess for such domestic companies
  • Such companies also not required to pay Minimum Alternative Tax
  • Companies availing exemptions can opt to pay a tax of 22% after the exemption period is over
  • Enhanced surcharge announced in Budget shall not apply on capital gains arising on sale of any securities including derivatives in the hands of foreign portfolio investors
  • he govt expects to widen tax basket with a lower tax rate
  • Buybacks pre-July 5 exempted from buyback tax
  • For new manufacturing companies that start production before March 2023 and incorporated on or after 1st October 2019, corporate tax rate brought down to 15% from 25%
  • Enhanced surcharge announced in Budget not to apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for STT
  • MAT for companies that want to use tax exemptions cut to 15% from 18.5%
  • The new tax rate will be applicable from the current fiscal which began on April 1.
  • Companies can opt for lower tax rate after the expiry of tax holidays and concessions that they are availing now
Why is the government cutting taxes?
  • The corporate tax cut one among the several steps taken by the government to tackle the slowdown in economic growth, which has dropped for five consecutive quarters to 5% in the June quarter.
  • The most immediate reason behind the tax cut may be the displeasure that various corporate houses have shown against the budget in July and government policies.
  • The lower corporate tax main objective is to boost investment by the private sector
  • The focus on boosting private sector investment stems from the fact that depressed consumption by private individuals and decline in investment by private businesses were identified as the two main reasons for the continuing deceleration of the Indian economy.
  • The two other factors that could have incentivized the economy – government expenditure and exports cannot be depended upon due to this financial year’s fiscal deficit and global economic climate respectively.
  • So, the cut in corporate tax has been chosen as the solution to increasing private investment.
  • The government hopes that the rate cut will make the existing and new businesses more attractive to invest and increase production thus creating more employment too.
What impact will it have on the economy?
  • The tax cut will put more money in the hands of the private sector and can offer people more incentive to produce and contribute to the economy.
  • .The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
  • The tax cut, however, is expected to cause a yearly revenue loss of ₹1.45 lakh crore to the government which is struggling to meet its fiscal deficit target.
  • At the same time, if it manages to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue.
What lies ahead? Some see the present tax cut simply as a concession to corporate houses rather than as a structural reform that could boost the wider economy. They believe that the current economic slowdown is due to the problem of insufficient demand which cannot be addressed just through tax cuts and instead advocate greater government spending to boost the economy. Others, however, argue that lackluster demand faced by sectors like automobiles is merely a symptom of supply-side shocks such as the goods and services tax that have affected various businesses and caused job losses. If so, tax cuts and other supply-side reforms can indeed help the economy recover from its slump. However, the government will also need to simultaneously enact along with these tax cuts other structural reforms that reduce entry barriers in the economy and make the marketplace more competitive. The government could, for instance, extend the tax cuts to smaller businesses. The benefits of the present tax cut will also depend on whether the government sticks to its promises in the long run. Investor confidence in the past, it is worth noting, has been affected by retrospective changes to the law made by governments in the past. What does a corporate tax cut aim to achieve? Details about the rate cut
  • The new tax rates apply to companies which do not avail of any exemptions or incentives.
  • The government also abolished the minimum alternate tax (MAT) for the companies that do not avail exemptions and incentives, while MAT has been reduced from5 percent to 15 percent for the ones that avail it.
  • All these moves would cost the government exchequer Rs45 lakh crore, almost one percent of the GDP.
Also read: Fat Tax  A case for a differential global carbon tax