New Delhi: The centre on Friday reduced corporate tax on domestic firms in a bid to boost the sluggish economy, hurt by slowing demand across sectors, especially manufacturing that is among the highest contributors to the Gross Domestic Product (GDP).
The markets immediately rose after the announcement by Finance Minister Nirmala Sitharaman, with the S&P BSE Sensex surging over 2,100 points and the NSE Nifty climbing above 11,250 mark, after days of choppy trading. While domestic companies have a lot to cheer about, the Finance Minister said she is “conscious” of the effect the announcement would have on India’s fiscal deficit target.
Domestic firms incorporated on or after October 1, 2019 that want to make fresh investment in manufacturing will have an option to pay income tax at 15 per cent, Sitharaman said at a press briefing in Goa.
She said the new effective tax rate will be reduced from 35 per cent to 25.2 per cent, which includes all surcharges and is applicable on those companies that aren’t availing any incentives. If calculated without the charges, the tax rate cut works out to 22 per cent from 30 per cent.
The new tax structure is effective from April 1, 2019. This change will be made through an ordinance to amend the Income Tax Act, 1961, she said. The centre will have to bear a cost of Rs. 1.45 lakh crore this fiscal to support its decision to reduce corporate tax, Sitharaman said.
The government had estimated tax revenue of Rs. 16.5 lakh crore in the year to March. “We are conscious of the impact all this will have on our fiscal deficit,” said Sitharaman, who’s targeted to narrow budget gap to 3.3 per cent of the GDP this year.
Any advance tax paid will be adjusted, the Finance Minister said. The new companies won’t have to pay minimum alternate tax (MAT), the Finance Minister said. MAT targets “zero-tax companies” that do not pay any tax due to concessions and incentives despite having earned substantial profits and paid high dividends.
The higher surcharge on the ‘super rich’ announced in the Union Budget this year will not apply on capital gains on sale of equity shares in a company that is liable to pay securities transaction tax (STT), Sitharaman said.
The measures are in addition to a series of steps announced by the government to boost demand and investments as economic growth slowed to a six-year low of 5 per cent in the quarter ended June.
The automobile sector that drives the manufacturing sector and is one of the biggest contributors to the Gross Domestic Product has been hit by several storms, from credit freeze for customers to falling demand. Many car-makers have temporarily stopped production and some have cut jobs.
Banks are also more reluctant to lend owing to a liquidity crunch caused by the near-collapse a year ago of IL&FS, one of India’s biggest shadow banks – finance houses responsible for significant consumer lending.
There are extra production costs caused by new rules requiring cars to be compliant with emissions and safety standards, while a 28 per cent goods and services tax (GST) introduced in 2017 has dampened demand, analysts said.
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