Corporate Tax Cuts - Finance Minister Gifts Mid-Year Tax Bonanza To India Inc.

The key corporate tax announcements made by FM today and their impact on domestic companies.

Workers test Hero Ignitor motorcycles after final assembly at the Hero MotorCorp Ltd. manufacturing facility in Gurgaon, India (Photographer: Prashanth Vishwanathan/Bloomberg)
Workers test Hero Ignitor motorcycles after final assembly at the Hero MotorCorp Ltd. manufacturing facility in Gurgaon, India (Photographer: Prashanth Vishwanathan/Bloomberg)

In a surprise move, Finance Minister Nirmala Sitharaman announced several changes to tax rates applicable to domestic companies. The amendments to the tax incidence on corporates will make India a competitive jurisdiction, experts said.

The key changes, which will come in via an ordinance, to the tax law include:

Headline Corporate Tax Rate Cut

Currently, companies with up to Rs 400 crore turnover per annum are taxed at 25 percent and companies with turnover above Rs 400 crore are taxed at 30 percent. The effective rates, including surcharge and cess, are 29.12 percent and 34.9 percent, respectively.

Now, all domestic companies have been given the option of paying tax at the rate of 22 percent as long as they don’t avail any tax exemptions or incentives. The effective rate for such companies, including surcharge and cess, will be 25.17 percent. Such companies will not be required to pay Minimum Alternate Tax as well.

This will effectively bring down the tax rate by at least 4 percent that will flow into our profitability, Subbu Subramaniam, chief financial officer at Titan Company Ltd., told BloombergQuint. It will also tempt companies to lower prices on their products and services as post-tax returns would still be good, he added.

These rates are globally competitive and of course a booster for companies looking at reinvesting surplus in business rather than declaring dividends as the latter would attract the additional dividend distribution tax, Rajeshree Sabnavis, founder, Rajeshree Sabnavis & Associates pointed out.

Vikas Vasal, partner at Grant Thornton India, said with this, the government has addressed the key demand of businesses to align India’s corporate tax rate with the current economic reality.

Most large economies like the U.S. and the U.K. have taken similar measures to attract capital and investments. To give credit to the government, it is heartening to note that these rates have been announced now and that the government did not wait for the next budget. 
Vikas Vasal, Partner, Grant Thornton India

The Finance Minister’s announcements suggest each company can work out the option which suits them most and accordingly pay taxes, noted Ashok Shah, partner at NA Shah Associates LLP . “This is a very welcome move and is expected to benefit all types of domestic companies, whether large or small, listed or unlisted, manufacturing, trading or service sectors.”

The detailed impact of this cut in the corporate tax rate is difficult to ascertain as the effective tax rate paid differed from company to company based on the incentives they had been availing.

The effective tax rate of Nifty companies on an aggregate basis was 26 percent which will now come down to 25.17 percent, said a note by Kotak Securities. There are only 20 Nifty companies which paid more than 30 percent effective tax rate and accounted for 43 percent of overall net profit in FY19. Any company paying 33 percent tax rate will see its earning go up by 12 percent, the note pointed out.

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Boost For Manufacturing

Any new domestic company incorporated post Oct. 1, 2019 making fresh investment in manufacturing can choose to pay income tax at the rate of 15 percent, the finance minister announced. This benefit will be available to companies which do not avail any exemption or incentive and commence their production before March 31, 2023. The effective tax rate for these companies will be 17.01 percent. Also, such companies will not be required to pay Minimum Alternate Tax.

The measures will have a tremendous impact on the manufacturing sector including new investments and this will enable companies to reduce prices and make new capital investments, RC Bhargava, chairman, Maruti Suzuki India Ltd., told BloombergQuint.

New investors who are coming in have to pay a lower tax rate. That’s something that has never existed. The cut in rate themselves don’t increase demand for products but manufacturers can take a lot of measures, like lower prices, to spur demand. 
RC Bhargava, Chairman, Maruti Suzuki

It will help in pricing policies and new companies will look at the advantages of investing in India, Bhargava added.

Given the trade war between the U.S. and China and the large Indian domestic market, several multinational companies are looking at alternative manufacturing locations and this move comes at an opportune time to promote India as a manufacturing hub, Suresh Surana, founder of RSM Astute, said.

While the list of what such incentives and exemptions are is not clear, it appears based on a similar provision, entities availing incentives under SEZ, sec 80-IB [deductions for industrial undertakings] , sec 35AC [deduction in business income of the amount paid to a local authority, PSU for a project], sec 35AD [deduction in respect of expenditure on specified business] etc would not be eligible for such lower rate if they wish to avail the exemption, Maulik Doshi, partner at SKP explained.

Companies that do not opt for the concessional tax regime will continue to pay tax at the pre-amended rate but they can opt for the lower tax rates after the expiry of incentives, the ministry statement said.

“After the exercise of the option they shall be liable to pay tax at the rate of 22 percent and the option once exercised cannot be subsequently withdrawn.” – Press Release, Finance Ministry

Finally, in order to provide relief to companies which continue to avail exemptions or incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5 percent to 15 percent.

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