It was a blockbuster day, the best in a decade, for the domestic equities as bulls took over the market. In what can be called a 'Fantastic Friday', Sensex and Nifty logged their biggest single day gains after finance minister Nirmala Sitharaman unleashed a surgical strike on negative sentiments in the economy by slashing corporate tax rate to 22 percent from the current 30%. The move gave an unexpected Rs 1.45 lakh crore windfall to corporates and pushed the benchmark Sensex by over 2,000 points at one point and made investors and company promoters richer by over Rs 6.6 lakh crore.
It was almost like a pre-Diwali party at Dalal Street with the domestic indices having a cracker of a day. The 30-share index soared 2,284 points to a peak of 38,378, before settling 1,921 points or 5.32 per cent higher at 38,014. Similarly, the broader NSE Nifty zoomed 569 points or 5.32 per cent to end at 11,274.
The markets cheered the FM's move that will help corporates for making further investments and ease their liquidity concerns. The tax reductions are aimed at reviving private investment and lifting growth from a six-year low. Experts hailed the news of tax cuts as being bigger than the last 20 budgets. Under the new corporate tax rates, India is now at par with advanced markets and Asian rivals such as China and South Korea thus making it very competitive. Let us first take a look at the tax breaks announced. They can be divided into five major areas.
1. In order to promote growth and investment, a new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income tax at the rate of 22% subject to the condition that they will not avail any exemption or incentive. The effective tax rate for these companies shall be 25.17% inclusive of surcharge and cess. Further, such companies shall not be required to pay Minimum Alternate Tax. "This should help large corporates invest in augmenting the businesses further," says Kumarmanglam Vijay, Partner, J Sagar Associates.
Companies having a turnover of less than Rs 400 crore will still be able to claim all exemptions and incentives which are available and pay tax at the rate of 25%. Such companies can opt to pay tax at the rate of 22% without claiming any exemptions or incentives. Since the gap is only 3%, for companies availing tax benefit/incentive, the benefit may be marginal, argues Ashok Shah, Partner, N A Shah Associates LLP.
2. In order to attract fresh investment in manufacturing and provide boost to ‘Make In India’ initiative, another new provision has been inserted in the Income Tax Act with effect from FY 2019-20 which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay income tax at the rate of 15%. The benefit is available to companies which do not avail any exemptions or incentives and commences their production on or before March 31, 2023. The effective tax rate for these companies shall be 17.01% inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
'Make In India' Initiative is set to get a major boost due to the new tax rate of 15% which allows any new domestic company incorporated on or after October 1, 2019 making fresh investment in manufacturing and which start operations on or before March 31, 2023, an option to pay income tax at the rate of 15%. Given the trade war between the US 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," says Suresh Surana, founder, RSM India.
A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after the expiry of their tax holiday/exemption period. After the exercise of the option, they shall be liable to pay tax at the rate of 22% and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5% to 15%.
3. In order to stabilise the flow of funds into the capital market, it is provided that enhanced surcharge introduced by the Finance (No.2) Act, 2019 shall not apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, HUF, AOP, BOI and AJP. The enhanced surcharge will not apply to capital gains arising on sale of any security including derivatives in the hands of Foreign Portfolio Investors (FPIs). "The decision towards enhanced surcharge of funds not applicable to capital gains including derivates FPI’s is seen as a bold step by the government. This move shall invite investments in capital markets by FII," says Parth Mehta, managing director, Paradigm Realty.
4. In order to provide relief to listed companies which have already made a public announcement of buy back before July 5, 2019, it is provided that tax on buy back of shares in case of such companies shall not be charged. S R Patnaik, partner and head – taxation, Cyril Amarchand Mangaldas says these moves are expected to unleash the 'animal spirits' in the Indian industry and put the economy back on high growth trajectory. “Specifically, the reduction of the Indian corporate income tax, clarification on the buyback tax and super-rich tax are very encouraging," he said.
5. The government has also decided to expand the scope of CSR 2 percent spending. Now CSR 2% fund can be spent on incubators funded by the Central or State Government or any agency or Public Sector Undertaking of Central or State Government, and making contributions to public-funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.
"The decision to allow CSR funds to be used for supporting incubators set up by the central and state governments as well as supporting universities, autonomous institutions and research bodies that are publicly funded, clearly indicates that the government wishes to promote PPP in scientific research and development and make India move up the innovation ladder," says Sandip Somany, President FICCI.
The tax cuts are aimed to revive consumption. The Indian stock market surged more than 5% and had their best day in more than a decade. India’s annual economic growth fell to a 25-quarter low of 5% in April-June period. The tax cuts, similar to what US President Donald Trump announced, are expected to trigger high growth.
Uday Kotak, head of Kotak Mahindra Bank, said in a tweet that reducing corporate tax rate to 25% is “big bang reform ... It signals that our government is committed to economic growth and supports legitimate tax abiding companies. A bold, progressive step forward.”
"With fiscal and monetary forces working in tandem and meaningful big bang reforms being announced alongside monetary easing, we believe the pervasive negative sentiment that exists today has bottomed and will begin to revive, feels Sunil Sharma, chief investment officer, Sanctum Wealth Management. "The markets will also deliver a positive wealth effect. The move in the markets will also deliver a positive wealth effect and will spur further financialisation, and engender efficient capital allocation," he added.
Ajay Piramal, Chairman, Piramal Group feels that with this the Government has signalled that it is listening to the Industry and is willing to embrace it as a partner for progress of the country. "We are certain that this Big Bang reform will kickstart the economy. Surplus funds available to companies will be invested in capex and talent. The NBFC sector will save between Rs. 250 - 300 crore that can potentially be redeployed as loans. In a climate of global slowdown, this reform will make India an attractive destination for FIIs and long term investors. The announcement has brought parity to India’s corporate tax rate compared to that of advanced markets thus making it very competitive.”
According to the announcement, the total revenue foregone for the reduction in corporate tax rate and other relief estimated is at Rs 1,45,000 crore. This quantum of money will act as an incentive to the industry in terms of savings and will result into further investments, says Ramesh Nair, CEO & Country Head – India, JLL. Moreover, companies will also have a leeway to pass on the benefit to consumers, thereby reviving demand.
Speaking on the government's announcements, G. Radhakrishna, Chairman and Managing Director of RKEC Projects, said “The announcement of reduction in corporate tax rate is really a big positive move by the Government as this step would stimulate corporate earnings and would enable companies to make new capital investments. These measures were much needed by the economy in terms of boosting private capex cycle and consumption.
Vinod Ramnani, Non-Executive Director of Opto Circuits, said “The overall sentiment of the market and corporate should lift and the economy should start showing some signs of recovery. The liquidity situation should also improve after Government’s directives to PSU Banks and NBFCs to increase credit flow to corporates.”
Madhu Sudhan Bhageria, Chairman and Managing Director, Filatex India Ltd said: "We welcome the announcement of reduction in effective corporate tax rate to about 25% as this would directly lead to big jump in profitability for manufacturing companies like us. Moreover, the lower base tax rate of 15% for new companies formed after Oct 1 is a again a great bold move to boost capital investments in private sector."
Speaking on the announcements, Vijay Mansukhani, Managing Director of MIRC Electronics, said “The announcement of reduction in corporate tax rate is really a big positive move as this will enable manufacturing companies to make new capital investments. This will increase the profit margins and capital investments across the sectors...the consumer spending during this festive season should increase, which should have good positive impact on consumer durables like LED Televisions, Air Conditioners and Washing Machines.”
The tax rationalization announcement by the FM today is in line with our expectations and along with the ongoing accommodative monetary policy, should help to revive the economy over the next few quarters. The liberal cuts of almost 10% on corporate tax rates for both existing and also new manufacturing companies would surely have an impact on the fiscal deficit for the current year, says Suman Chowdhury, President - ratings at Acuité Ratings & Research Ltd.