Historic Tax Reform: Reduction in Corporate Taxes

Akash Dubey

26 Aug, 2020

In a recent announcement, the Finance Minister of India, Nirmala Sitharaman^[1] slashed corporate tax rates. The government did reduction in corporate taxes rate to 22% from the reigning tax slab of 30%. Additionally, the tax rate for the new manufacturing company has been reduced to 15% from the prevailing rate of 25%.

The news came as a part of series of measures practiced by the government to strengthen the falling economic growth. The economic growth has been down below the 5% mark. The impact of this decision is positive for the markets. The move was welcomed by the investors as well as the corporate world. However, the government will lose 1.45 lakh crores in revenue as an adverse impact of the decision.

The domestic company can pay 22% tax, excluding cess and surcharge. The effective tax rate after accounting for cess and surcharge will be 25.17 %. The effective tax rate, including cess and surcharge, will be 17%. 

There is another beneficial provision for manufacturing companies. The manufacturing companies incorporated after October 2019 and commence production before March 23 will pay 15 % corporate tax in place of 25 %. The companies will pay tax as per the prevailing income tax slab after the expiry of their tax holiday period.

Additionally, enhanced surcharge announced during the budget session is not applicable to capital gains arising on the sale of any securities. These securities include derivatives in the hands of foreign portfolio investors. The capital gain that arises as a result of the sale of equity shares in a company or in a unit of a business trust or an equity fund liable to the tax under securities transaction tax is also exempted from tax purview.

For the listed companies, the companies that announced a buyback of shares before July 2019 are not liable to pay tax ohm buyback of shares. The tax rates are applicable from the current fiscal year that began on April 1, 2019.

Further, the Minimum Alternative Tax rate has been reduced to 15 % from the existing 18.5 %for companies which opt for incentive or exemptions.

The government has expanded the scope of spending 2 % of profits on corporate social responsibilities. Entities can now spend the amount on incubators, research grants to institutes that are promoting scientific research.

“Tax concessions will bring investments in Make in India, boost employment and economic activity, leading to more revenue,”- Quoted by the Finance Minister.

The Reactions

After the Reduction in Corporate Taxes, The market responded positively after the announcement. Major industrial chambers and federations appreciated the move of the finance ministry.

With these measures, Indian corporate tax rates have come down to amongst the lowest in the world, especially for the new manufacturing companies. These decisions will be celebrated as historic and will go a long way in improving ‘Ease of Doing Business In India’ even further. We, at BSE, welcome these moves and thank the Hon’ble PM and Hon’ble FM for promoting industrialization in India with these measures. These announcements will further boost the investor confidence and start the investment cycle – Ashishkumar Chauhan, MD & CEO, BSE

The market sentiments can be understood by the fact that the share market took a plunge of 10-year high record for a single session gain. The Sensex was up by 1921.15 points or 5.32 % and closing at the mark of 38014.62. Nifty, on the other hand, was up by 569.40 points closing at 11274.20.

Read our article:Corporate Tax Rate Cut to Increase the Manufacturing of Electronic Vehicles Parts