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Diwali came early for India Inc and the bourses after the Centre slashed effective corporate tax to 25.17 per cent, inclusive of all cess and surcharges, for domestic companies. Making the announcement, Finance Minister Nirmala Sitharaman said the new tax rate will be applicable from the current fiscal which began on April 1.
The revenue foregone for this move will be Rs 1.45 lakh crore annually. The move is a lift for Prime Minister Narendra Modi who was facing increasing pressure to relight once-stellar economy after five consecutive quarters of slowing growth saw India this year lose its status as the fastest-expanding major economy to China.
Sitharaman said the new rates would be “comparable with the lowest tax rates in South Asian region and in South East Asia”. The announcement sent shares soaring more than five percent in Mumbai — the biggest jump in 10 years — while the rupee and firmed against the dollar.
Nirmala Sitharaman, the star of Blockbustor Friday
Indian stock markets have been on course for the biggest quarterly exodus since at least 1999, with foreign funds having dumped a net $4.9 billion worth of stocks since June. Sitharaman, however, sidestepped questions on the impact the concessions will have on the fiscal deficit target, saying that the government was conscious of the reality and will reconcile numbers.
Here’s what Nirmala Sitharaman brought in on Friday:
New domestic manufacturing companies incorporated after October 1, can pay income tax at a rate of 15 per cent without any incentives. Meaning, effective tax rate for new manufacturing companies will be 17.01 per cent inclusive of all surcharge and cess. Sitharaman further said companies can opt for lower tax rate after expiry of tax holidays and concessions that they are availing now.
The government has also decided to not levy enhanced surcharge introduced in Budget on capital gain arising from sale of equity shares in a company liable for securities transaction tax (STT).
It’s a big bazooka and a very positive step-Vaibhav Sanghavi, co-CEO, Avendus Capital
Also, the super-rich tax will not to apply on capital gains arising from sale of any security including derivatives in hands of foreign portfolio investors (FPIs). “The government has taken a bold and proactive step to bring the much-needed tax reforms, which will boost investment and also aid to private cycle capex. The lowering of corporate tax rates will widen the tax net and gradually bring in more revenues to the government. Overall, the move will make Indian companies globally competitive, a welcome step to arrest slowdown and lift up the market sentiments,” said Sanjeev Hota, Head of Research, Sharekhan.
In another relief, the minister said listed companies which have announced buyback of shares prior to July 5, will not be charged with super rich tax. About a dozen companies, including technology major Infosys, which have active buyback programmes would benefit from the decision to not levy 20 per cent buyback tax imposed in this year’s Budget. The Union Budget had made it mandatory for listed companies to pay an additional tax at 20 per cent on share buybacks. The move, aimed at discouraging the practice of avoiding the dividend distribution tax, came into effect on July 5, 2019.
Also, firms have now also been permitted to use their 2 per cent CSR spend on incubation, IITs, NITs, and national laboratories. Sitharaman expressed confidence that the tax concessions will bring investments in Make in India, boost employment and economic activity, leading to more revenue.