Macro Moves

Corporate Tax Slashed: An Early Diwali for Corporates

Saloni Parakh

Created on 20 Sep 2019

Wraps up in 3 Min

Read by 4.4k people

Updated on 08 Oct 2020

Announcement of corporate tax rates cut from percentage 35 to 25

A significant bang reform has been introduced by the Finance Minister Nirmala Sitharaman on 20 September 2019. A reform that has been called "historic" by the Prime Minister himself because it will stimulate the market for the "Make in India" scheme. Many experts believe that this tax reform will eliminate the gloom surrounding the Indian economy.

Wondering what this progressive and tax reform is about?

The FM Nirmala Sitharaman made a very bold move by declaring some major tax reforms for the corporate sector. There were sharp reductions in the corporation tax for domestic companies among other announcements. The resolve and initiatives taken by the government on this matter will amount to about Rs 1.45 trillion annually.

What were the highlights of this announcement?

The following were the key highlights of the measures taken by the FM to boost the economy:

All domestic companies will be permitted to pay corporation tax at the rate of 22% (effective rate 25.17% including cess and surcharge). This is subject to the fact that the companies do not avail of any tax exemptions or incentives. In addition to that, no Minimum Alternative Tax (MAT) will be imposed on these companies.

A corporation tax rate of 15% (effective rate 17.01%) will be payable by the new domestic manufacturing company, incorporated on or after 1 October, 2019, and no MAT will be imposed on them too. This will be binding only if the company does not avail of any tax incentives or exemptions. These companies must begin production by 31 March 2023.
The companies that avail of exemptions and incentives will have the imposition of MAT at a rate of 15% reduced from 18.5%.
The increased surcharge introduced in the Budget 2019 on capital gain arising from the sale of equity shares in companies liable for a securities transaction tax will not be levied.

The super-rich tax will not apply to capital gains from the sale of any security, including derivatives for the foreign portfolio investors (FPIs).

Any of the listed companies that have already made a public announcement of buyback before 5 July 2019 will be relieved from paying any super-rich tax on such buyback.
Concern for CSR activities has also been shown. The companies have now been allowed to use their 2 percent CSR spends on incubation, IITs, NITs, PSUs, state universities and national laboratories. This will boost employment because of increased investments in Make in India and will lead to higher revenues.

What was the effect on the Indian bourses?

Sensex surged over 1,900 points due to the announcement by the FM regarding the corporate tax bonanza. Sensex and Nifty logged their biggest one-day gains in almost ten years. This slash of the corporate tax rates happens to be a major booster for the Indian economy and domestic markets.

The tax bonanza by the FM Nirmala Sitharaman to FPIs and corporate sector gave D-Street investors Rs 5 lakh crore lift within a few minutes of the announcement. BSE market capitalization surged to 143.45 lakh crores on 20 September 2019 as compared with Rs 138.54 lakh crore on 19 September 2019 and the NSE barometer Nifty50 jumped 500 points, their highest intraday gains in a decade.

The bond markets on Friday started faltering after the Finance Minister Nirmala Sitharaman announced the cut in the tax rate for corporate. The cost to the government for these fiscal measures is Rs 1.43 lakh crore, which will impact the government estimates for fiscal deficit at a time when revenue growth isn’t up to mark.

The rupee appreciated 66 paise to 70.68 against the US dollar following the announcements.

Conclusion

It is a big positive step and is being taken very positively in the markets also. Most experts in the market have expressed very affirmative reactions to this measure taken by the government and firmly stand on the ground that this could alleviate the slowdown in the economy eventually. Analysts believe that the move will aid NIFTY earnings per share (EPS). S Subramanian, CFO of Titan also considers the move as extremely positive and believes that “This can be called an early Diwali.”