India cuts corporate tax rates

Clay Curtis
September 20, 2019

BSE Sensex surged over 1,500 points on Friday after the government slashed corporate tax for domestic companies and new domestic manufacturing companies among other measures. The Sensex zoomed as much as 2,284.55 points to touch 38,378.02 during the session before settling with a gain of 1,921.15 points, hours after the Finance Minister said the effective corporate tax rate for companies will be 25.2 per cent including all additional levies.

"High tax-paying companies like Maruti Suzuki, HDFC Bank are just zooming".

Meaning, effective tax rate for new manufacturing companies will be 17.01 per cent inclusive of all surcharge and cess.

Tax on all domestic companies will be lowered to 22% from a base rate of 30% now, Finance Minister Nirmala Sitharaman said Friday.

The lower corporate tax effected for 2019-20 through an ordinance is set to induce private investment and boost consumption, the two key growth engines.

"The measures announced by the finance minister this morning can be described as a "New Deal" for the Indian economy", said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

SBI Chairman Rajnish Kumar said that the large reduction in corporate taxes across the spectrum of all companies is perhaps the boldest reform in the last 28 years.

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In a related development, authorities said listed companies that made public announcements of share buybacks before July 5 would be exempted from tax on the buybacks.

GST Council cuts tax on hotel room tariffs of ₹1,000 to ₹7,500/night to 12%; those above ₹7,500 to 18%. While withdrawal of exemptions and incentives was expected in due time, the government has provided enough motivation to corporates to choose the path of paying taxes at a reduced rate and give up incentives and exemptions.

India has been seeking to boost its tepid manufacturing sector through its "Make in India" campaign.

"These are massive steps to make India competitive", said Amit Maheshwari, a partner at Gurgaon-based Ashok Maheshwary & Associates LLP, a tax consultancy firm. The companies making incorporate after October 1, 2019, would be eligible for lower 15 per cent tax.

The tax cut translates into a revenue loss of $20.5 billion for the current fiscal year.

"We are in a state of coordinated policy response both by the government and the RBI", said Madhavi Arora, an economist with Edelweiss Securities Mumbai. "But, no event can hide the reality of the economic mess "HowdyModi" has driven India into", Gandhi claimed on Twitter, referring to the amount of relief the announcement will give to the corporate sector. That increases the risk of the government missing its fiscal deficit target of 3.3%, considering tax revenue has already been weak.

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