Take a bow, FinMin. A long-awaited corporate tax rate cut was announced on the 20th of September 2019 by FM Nirmala Sitharaman. The corporate tax rate has been slashed from the base rate of 30% to 22% for the domestic companies. The companies will have the option to pay tax at the reduced rate of 22% (plus surcharge and cess).
Before this amendment, a domestic company with a turnover of less than Rs 400 crore in the FY 2017-18 was taxed at a rate of 25%. In all other cases, the companies were taxed at a rate of 30%. From FY 2019-20 onwards, these companies will have an option to pay tax at the rate of 22% on the total income.
The total income chargeable to tax will be computed without claiming specified deductions, incentives, exemptions and additional depreciation available under the Income Tax Act.
The effective tax rate under this new regime will be 25.17% (inclusive of 10% surcharge and 4% health and education cess). These rate cuts will make India more competitive as compared to other Asian economies like Sri Lanka, Bangladesh, China, the Philippines, Malaysia, Japan, and many more.
Here’s a comparative graph of the base corporate tax rate prevailing in Asian countries for the year ending 2019:
Among the total number of active companies in India i.e. 11,86,053 as on 31st August 2019, only 50,000 to 80,000 companies, having a turnover exceeding Rs 400 crore in FY 2017-18, are paying 30% income tax on their income, which is equivalent to the Philippines (Asian country with the highest base income tax rate).
This amendment has moved our country to the bunch of Asian countries having the lowest corporate tax rates. Also, lower corporate taxes will attract foreign investment and boost production in the country, which will also revive the economic growth of the country.
The country’s economy is currently going through its worst slowdown in the last six years. The official national figures released on the 30th of August 2019 confirmed that the economy is going through a bumpy ride in this fiscal.
This has pressurised the government to announce a slew of measures, which can turnaround the deceleration of the economy. Along with lowering the corporate tax cuts, the FM also rolled back the enhanced surcharge levied on capital gains earned by the foreign portfolio investors (FPIs) and eased the bank credit rules to boost the economy.
The lower tax rates on companies will ideally result in higher profits. These companies will pass on the benefits to their product by lowering their prices for consumers. The resultant change in profitability will prompt the companies to invest more and raise their capital expenditure. This capex will lead to a rise in the production capacity of the businesses. Adding additional production capacity will trigger employment in the country.
The FinMin has addressed the supply side issues of the economy by lowering the tax rate for corporates. With the help of the wealth effect, the consumption demand of the country is also expected to see a rise soon.
One must look at the broader aspect of these structural amendments made by the FM. These moves are fine developments towards making India a $5 trillion economy by the year 2025. To make India a preferred destination of businesses for investments globally and to resurrect the economy, let’s welcome this decision of the government whole-heartedly.
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I am an aspiring Chartered Accountant. I spend most of my free time dredging through the various Indian finance subreddits. I am a semi-professional bowler with a high strike rate every time there is a new tax reform!