Mini-budget after Budget: Govt slashes corporate tax rate 10%
PANAJI: Grappling with a six-year low economic growth and a 45-year high unemployment rate, the government on Friday slashed corporate tax rates for companies by almost 10 per cent to 25.17 per cent to bring them at par with Asian rivals such as China and South Korea, as it looked to boost demand and investments.
The new tax structure is effective from April 1, 2019. It will cost the government Rs 1.45 lakh crore in revenue annually and may potentially derail the country’s fiscal deficit roadmap.
In the fourth phase of post-budget economic stimulus measures, Sitharaman cut base corporate tax for existing companies to 22 per cent from current 30 per cent; and for new manufacturing firms, incorporated after October 1, 2019, and starting operations before March 31, 2023, to 15 per cent from current 25 per cent.
This will be effective on the condition that these companies will not avail any other incentive or concession such as tax holiday enjoyed by units in Special Economic Zones
(SEZ) and accelerated depreciation.
The effective tax rate for existing units, after considering surcharges and cess such as Swachh Bharat cess and education cess - which are levied on top of the income and corporate tax rates, will be 25.17 per cent as compared to 34.94 per cent now. For new units, it will be 17.01 per cent now as opposed to 29.12 per cent.
Sitharaman also said no tax would be charged on share buyback by listed companies that announced such a move before July 5.
Also, super-rich tax by way of enhanced surcharge on income, announced in the July 5 Budget, will not apply to capital gains arising on equity sale or equity-oriented funds
liable to securities transaction tax (STT) to stabilise the flow of funds into capital markets.
Also, the companies will not have to pay minimum alternate tax (MAT).
She said any company which does not opt for concessional tax regime and avails tax exemptions or incentives should continue to pay tax at pre-amended rates.
To provide relief to companies which continue to avail exemptions and incentives, rate of MAT has been reduced from existing 18.5 per cent to 15 per cent.
Prime Minister Narendra Modi termed as “historic” the cut in corporate tax rates and asserted that economic announcements made in the
last few weeks show that his government is leaving no stone unturned to make India a better place to do business. Home Minister Amit Shah said the slashing of corporate tax rates would make the country’s markets “much more exciting” for potential investors.
MUMBAI: The spectre of fiscal slippages awaits the country after the massive tax giveaways, which though will boost the sputtering growth engine and is positive from a long-term perspective, warned analysts.
"Considering the present slowdown chances are high that the government might miss the fiscal deficit target for FY20," Deepthi Mathew, an economist at the domestic brokerage Geojit Financial Services, said.
She, however, added the move will be helpful from a
long-term perspective for the fiscal. Largest private sector
lender HDFC Bank's house economists said the fiscal deficit number will bloat up to 4.1 percent as against the targeted 3.3 percent and also result in Rs 1.50 lakh crore in excess government borrowing beyond the budgeted Rs 7.04 lakh crore.
It can be noted that the government might miss the tax revenue target by a wide margin is clear from the first half direct tax mop up, which inched up just 4.7 percent against a steep 17.5 percent budgeted for the year. GST has also been missing as only in April it could cross the ideal Rs 1 lakh crore mark so far this fiscal year. Fiscal deficit number is a closely watched one by rating agencies tracking the sovereign's financial health due to its impact on inflation and overall macroeconomic stability. In the past, the country's ratings and outlooks have been influenced by this number.
Without commenting on the fiscal deficit or impact in government finances, global ratings agency Moody's welcomed the moves as "credit positive".
The government slashed corporate tax by almost 10 percentage points with the Rs 1.45-lakh crore tax giveaways in the measures announced by Sitharaman in Goa. It has chosen to implement the same due through the ordinance route.
"These measures would increase the chances of higher fiscal deficit and government may have to resort to spending cuts or embark on higher disinvestments," Arun Thukral, the head of the brokerage Axis Securities, said.
Domestic rating agency Icra's chief economist Aditi Nayar said fiscal slippage "appears inevitable" now and added that expenditure cuts will be required to prevent the fiscal deficit as well as G-sec yields from rising too sharply.
"Additionally, lower Central tax collections will impact the states' fiscal situation as well through likely cuts in central tax devolution, and borrowing constraints may necessitate state government expenditure restraint or deferral," she said.
An analysis of BSE500 companies by the brokerage Emkay reveals companies should see a 12 percent drop in tax bill on their FY19 numbers, and pegged the impact to fiscal deficit because of the moves at 0.40 percent.
"Slashing the corporate taxes, although hits the fiscal deficit space, could attract FDI inflows (where the focus is shifting from China) and kick start the private investment cycle," it said, adding the impact may not be very inflationary.