Major Tax Rate Cut announced to boost the economy

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Major Tax Rate Cut announced to boost the economy!

After announcing various measures for Banks, Real Estate sector / Homebuyers and exporters, here comes the best gift to the corporates. FM Nirmala Sitharaman today, announced some important tax relaxations to the domestic companies and new companies in order to promote growth. The stock market immediately rose beyond 1500 points and more.

The changes introduced are listed below:

Tax Rate Change to 22% and 15%

FM announced the insertion of a new provision in the Income Tax Act with effect from the FY 2019-20,  that allows any domestic company to pay income tax at the rate of 22%. The only condition is that they will not avail any incentive or exemptions. The effective tax rate for these companies shall be 25.17% incl surcharge and cess. There are many corporates who might benefit the lower tax rates and will benefit from this decision.

Along with this, a new structure of tax has been introduced for the new manufacturing companies to attract investments and boost “Make in India”. Manufacturing companies set up after October 1, 2019, will get an option to pay 15% tax. The effective tax rate for the new manufacturing firms to be 17.01% inclusive of surcharge & tax. This benefit is available to companies that do not avail of any exemption/ incentive and commences their production on or before 31st March 2023. The effective tax rate for these companies shall
be 17.01% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax.

A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the
pre-amended rate. However, these companies can opt for the concessional tax regime after the expiry of their tax holiday/exemption period. After the exercise of the option, they shall be liable to pay tax at the rate of 22% and the option once exercised cannot be subsequently withdrawn.

Further, in order to provide relief to companies that continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from the existing 18.5% to 15%.

Click here to check Income Tax Slab Rates of individuals – FY 2019-20 (AY 20-21)

Tax-free Buyback of Shares

The budget 2019 presented on July 5, 2019, announced the tax on buyback of shares effective April 1, 2019. In this announcement today, the tax on buyback of shares is removed for the listed companies that have announced buyback before July 5, 2019.

Boost for Capital Markets – Higher surcharge trashed

The Budget 2019 announced on July 5, 2019, introduced a higher surcharge for the high-income earning group. FM in today’s announcement explained that the higher surcharge will also not apply

  • on capital gains on the sale of security including derivatives held by FPIs
  • 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 a securities transaction tax, in the hands of an individual, HUF, AOP, BOI, and AJP

This will attract more foreign investments in India. The USD / INR rate immediately improved to Rs 70.8 / USD.

This announcement addresses the negative sentiments of the corporates as well as capital markets. The day is not less than the “Diwali” sentiment for the corporates and stock exchanges.

Click here to understand the existing Surcharge on Income Tax 

CSR

The Government has also decided to expand the scope of CSR 2% spending. Now CSR 2% fund can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government, and, making contributions to public-funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.

Finally, the Budget that Counts?

The year 2019 has witnessed 1 interim Budget in February 2019, 1 full Union Budget announcement in July 2019 and many piecemeal announcements post-budget by FM. As mentioned by a prominent personality today, though we were counting the budgets this year, this is the “Budget that counts”. Though in the last few meets, the FM was stressing on the fact that the Indian economy is growing; the fact that there were reform announcements was keeping the nation is suspicion about the economic growth. These tax reforms will certainly boost the economy as the attractive tax rates will bring more capital investments. The corporate profits will improve, and so will the stock market. The new tax rate will benefit almost all the prominent corporates unless they are already availing some tax benefits or in the tax bracket of 18%- 22%. The lower tax rate for new manufacturing units might help the new industries to set up in India or move from outside India like China etc to India. Hopefully, India will benefit from this change amidst the ongoing Trade War.

Having said this, the Big News does not directly benefit an Individual or professional who is not active in the capital market. The reforms do not assure more job creation or, the tax savings by corporates do not assure improvement in the salaries of the individuals. Accordingly, improvement in spending capacity is still unsure. The total revenue foregone for the reduction in corporate tax rate and other relief estimated at Rs. 1,45,000 crore.

It will be interesting to see if the rally remains only for a moment or the momentum continues. Finally, we certainly need a boost to the economy and we would like to put some thrust on today’s reforms for the improvement in the investment cycle. Hopefully, the economic outlook will improve with this announcement.

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About CA Janhavi Phadnis 78 Articles
Chartered Accountant and financial consultant. She has worked with corporates for 14 years with expertise in Forex-Treasury, Accounting, and Corporate Tax. She can be contacted at info.financepost@gmail.com

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