The finance minister of India recently announced one of the biggest reforms for the corporate sector. Finance ministry declared tax rate cut for corporate sector and also fulfilled the demands of various sectors to slash GST rates. Indian government introduced the Taxation Laws (Amendment) Ordinance, 2019 to make certain amendments to the Income Tax Act, 1961 (the IT Act).
Corporate tax rate cut
The aim of the move is to revive investments in Make in India, boost economic activity hence leading to more revenue. The tax rate cut is supposed to cost the government a whopping 1.45 lakh crores.
Let’s look at the changes announced :
- Tax rate has been brought down to 22% from 30% for companies that do not avail any exemption. The effective tax rate will be 25.17 %.
- Domestic companies incorporated on or after 1st october 2019 will enjoy the benefit of tax reduction. The corporate tax for such companies has been brought down to 15% from 25%. This option is available to all those companies who do not avail any exemption and commence their production before on or before 31st March
- Effective tax rate will be 17.01% also the companies don’t have to pay Minimum alternate tax
- If any company chooses to avail exemptions they can continue paying the pre amended tax
- For Companies who will continue to avail exemptions the MAT has been decreased to 15% from 18.5
- Government also rolled back the enhanced surcharge on capital gains from sales of equity shares and units of equity-oriented mutual funds as long as the securities transaction tax was liable. it will also apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs).
Why is the reform so significant?
The reform has made India’s corporate tax the lowest if compared to the global average in Asia. The global average corporate tax rate is 23.79 now, and the Asian average is 21.09 per cent. Statutory tax rate in Myanmar is 25 percent, in Malaysia, it is 24 per cent, in Indonesia and Korea 25 per cent and Sri Lanka 28 per cent. The new corporate income tax rates in India will also be lower than USA (27 percent), Japan (30.62 percent), Brazil (34 percent), Germany (30 percent) and is similar to China (25 percent) and Korea (25 percent).
How does this help Top listed companies
The new decreased taxes will will give a one-time boost of 13.2 percent to corporate net profit and earnings per share of India’s top listed companies. The tax liability of all the companies combined will reduce by around Rs 45,000 crore compared to previous year.
Large consumer companies and financial institutions are likely to be paying the highest taxes and stand to benefit.
State Bank of India
Effective: 46.4%
New: 25.6%
HDFC Bank
Effective: 34.5%
New: 25.6%
Hindustan Unilever
Effective: 30.7%
New: 25.6%
Bajaj Auto
Effective 30.3%
New: 25.6%
Maruti Suzuki
Effective: 28.3%
New: 25.6%
L&T
Effective: 30.4%
New: 25.6%
Asian Paints
Effective: 33.6%
New: 25.6%
Whirlpool
Effective: 35.0%
New: 25.6%
A helping hand to Make in India
Slashing of tax rate will discourage Indian companies from rushing to invest in Startups in foreign countries.This move will spur local domestic investment but also attract foreign direct investment creating new jobs, bringing new technology and boosting exports giving a fillip to the ‘ Make in India’ initiative.
Boon for FMCG companies
The tax cut means more cash in hand. This means that the savings can be utilised to offer trade discounts to customers. To give an estimate, FMCG companies on the Nifty (ITC, Nestle, Britannia, HUL), would see their effective tax reducing from 29-35 percent to 25 percent, leading to retention of a cumulative Rs 2,000 crore earnings on the basis of FY19 numbers. This corresponds to 9 percent of net earnings for FY19.
Hope for automobile sector
Automobile sector has been gloomy for a while. Decrease in tax rates would mean that companies can pass on the benefits to the customers in the form of freebies and discounts ahead of Diwali.
GST rate cuts have been announced for hotels, gems & jewellery, defence and automobiles. GST on job work in the diamond industry has been brought down to 1.5% from 5%. GST on cut and polished semi-precious items has been reduced to 0.25% from 3%.Tax on hotel room tariffs of ₹1,000 to ₹7,500/night to 12%; those above ₹7,500 to 18%. No GST on rooms below Rs 1000. Outdoor catering taxes have been slashed to 5% from 18%.
The hotel industry has welcomed this decision with open arms. It is hoped that this change will boost tourism and will bring job opportunities in the sector.
There is no doubt in the fact that the Modi government has been paying heed to the demands of the corporate sector. The decision to reduce tax base is not only path breaking but was much needed to revive the economy. The reform not only has a long term effect but will start a chain of positive effects on the economy. This move will have a positive effect on local and foreign investors as well. This also means that India can take advantage of the ongoing trade war between US and China.
