FM Sitharaman announced a corporate tax cut for domestic companies and new domestic manufacturing companies

Centre had slashed effective corporate tax to 25.17% inclusive of all cess as well as surcharges for domestic corporations. Finance Minister Nirmala Sitharaman made the announcement and stated that the new tax rate shall be applicable from the current fiscal which began on 1st April.
 

In an attempt to boost investment in the economy, Government had announced the lowering of corporate tax, efficiently by 10 percentage points for existing corporations and 12 basis points for the new corporations.

Altogether there are 6 amendments made in the Income Tax Act and Finance Bill 2019 which would cost Rs 1.45 lakh crore.
 

FM Nirmala Sitharaman made it clear that there would not be any sunset clause for the new exemption. She also cleared it that she would take into cognizance all the numbers coming out of the reduction in GDP growth rate as well as lower tax collection.
 

Sitharaman stated the revenue foregone on reduction in corporate tax as well as other relief measures would be Rs 1.45 lakh crore annually. She also stated that this was done for promoting investment and growth as the tax concessions would bring investments in Make in India, improving employment and economic activity, which would lead to more revenue.

The amendments made in the Income Tax Act are;
 

1. With the intention of promoting growth and investment, a new provision was introduced in the Income Tax Act with effect from Financial Year 2019-20 which would allow any domestic corporation an option to pay income-tax at the rate of 22% subjected to the condition that they shall not avail any exemption or incentive. The effective tax rate for these corporations would be 25.17% inclusive of surcharge and cess. Also, such corporations are not being required to pay Minimum Alternate Tax (MAT).
 

2. With the aim of attracting fresh investment in manufacturing and thus provide boost towards ‘Make-in-India’ initiative of the Government, one additional new provision was introduced in the Income Tax Act with effect from Financial Year 2019-20 which would allow any new domestic corporation incorporated on or after 1st October, 2019 making fresh investment in manufacturing, an option towards paying income-tax @ 15%.
 

This benefit shall be available to corporations which do not avail any exemption or incentive and begins their production on or before 31st March 2023. The effective tax rate for these corporations shall be 17.01% inclusive of surcharge and cess.  Also, such corporations are not being required to pay MAT.
 

3. A corporation which doesn’t opt for the concessional tax regime and avails the tax exemption or incentive would continue to pay tax at the pre-amended rate. Though, these corporations could opt for the concessional tax regime after expiration of their tax holiday or exemption period.
 

After the exercise of the option, they would be liable towards paying tax @ 22% and the option once exercised could not be subsequently withdrawn. Furthermore, in order to furnish relief to corporations which continue to avail exemptions or incentives, the rate of MAT was reduced from existing 18.5% to 15%.
 

4. Also to stabilize the flow of funds into the capital market, it is furnished that enhanced surcharge presented by the Finance (No.2) Act, 2019 shall not be applicable on capital gains arising on sale of equity share in a corporation or a unit of an equity-oriented finance or a unit of a business trust liable for securities transaction tax, for an individual, HUF, AOP, BOI as well as AJP.
 

5. The enhanced surcharge would also not be applicable towards capital gains arising on sale of any security which includes derivatives, in the hands of Foreign Portfolio Investors (FPIs). 
 

6. With the intention of providing relief to listed corporations which have already made a public announcement of buy-back before 5th July 2019, it is provided that tax on buy-back of shares in case of such corporations would not be charged.
 

It was also decided that in order to expand the scope of CSR 2% spending. Now CSR 2% fund could be spent on incubators financed through central or state government or any agency or Public Sector Undertaking of central or state government, as well as, making contributions towards public underwritten Universities, IITs, National Laboratories and Autonomous Bodies (established under the umbrellas  of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) involved in conducting research in science, technology, engineering as well as medicine intended at promoting SDGs.
 

Conclusion :
 

The new corporate tax cuts are estimated to boost economic growth, which slipped to a 6-year low of 5% in the April-June quarter.
 

FM Nirmala Sitharaman had accepted that the tax cuts would impact India's fiscal deficit. Since the government is seeking to keep liquidity flowing, FM Nirmala Sitharaman had advised banks to increase lending to small businesses as well as retail borrowers to spur spending ahead of the final quarter of the festive season.
 

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eStartIndia Team