The government has come out with a mega corporate tax cut stimulus on Friday, 20th of September. Though this is the fourth stimulus programme in a series that the government launched since the confirmation of the slowdown, this one is unique and powerful. The tax cut is impactful because:

  1. It will raise positive investment sentiment in the economy.
  2. Workable: Encouraging corporate to create more investment is the best way to trigger positive sentiments than the government directly making higher spendign.
  3. There will be a considerable revenue loss form the government; and this is the cost for the tax cut.

How far is the tax cut?

As part of the corporate tax cut stimulus, the Finance Minister slashed the basic corporate income tax rate to 22%. Currently it is 30% for companies who have an income of over Rs 400 crore. Similarly, the tax rate for new companies will be a much lower 15% and the Minimum Alternative Tax (MAT) is reduced to 15% from 18%.

Following are the steps taken by the government in this stimulus round.

  1. The basic corporate income tax (CIT) rate for Indian companies reduced to 22%. The aggregate tax rate will be 25.17% including cess and surcharge. Companies availing this new rate should not claim any deductions and exemptions.

Table: Corporate income tax rate change

New rate Previous rate
22% basic

25.17% with cess and surcharge

30% for companies who have a turnover of over Rs 400 cores

25% for companies who have a turnover of Rs 400 crore or less.

No deduction and exemptions (for the above rate) Deductions and exemptions permissible (for the  above rate)
15% tax rate for new companies. Total tax here with cess and surcharge will be 17.01%
15% Minimum Alternative Tax (MAT) 18.5% MAT
  1. Minimum Alternative Tax has been reduced to 15% from 18.5%. MAT was launched to tax those companies who doesn’t have a taxable income. Here, the tax is imposed on book profit.
  2. For new investment made by companies after October 1, 2019, a concessional 15% tax rate will be applicable. This tax rate is expected to encourage new investments in the economy.

Five reasons why this corporate tax cut is a big stimulus?

There are some beautiful reasons why this tax cuts is a remarkable one as a stimulus programme.

  1. Any stimulus must raise the investment sentiment in the economy. Only if the corporate raise their investment, the economy can come out of the slowdown. In this context, the present measures are useful as they tempt the corporate to make investment, given the new tax rates.
  2. The low 15% tax rate on new companies is tempting for corporate to make new investment. Such a nice and calculative step may encourage investment sentiments.
  3. The move to 25% is more than a reform update: Actually, India was moving from 30% CIT to 25% rate in a phased manner. Already for companies with a turnover of less than Rs 400 crores the tax rate is 25%. It was expected that the government will be applying the 25% rate to all companies by next year. In this planned timeline, the new 25% is a usual one. Still, lowering the tax rate to a much lower 22% and limiting the aggregate thus to 25.17% is tremendous.
  4. The fiscal impact: Nobody can forget the fiscal pain that the government is taking while encouraging corporate to make investment. The government’s tax revenue loss from this rate cut is expected to be around Rs 1.45 lakh crores. Remember, the corporate tax is the largest tax revenue for the government. The total tax revenue from CIT for 2019-20 was expected to be Rs 7.66 lakh crores. Now with the rate cut, it may be around Rs 6 lakh crores.

Despite the emergence of the mighty GST, after merging central government’s three important taxes, the CIT revenue remained higher than the GST revenue. This shows the significance of the CIT as a tax revenue for the central government.

  1. Slashing CIT is tax competition: All across the world, countries are reducing corporate taxes to attract more investment. Trump has slashed CIT from 35% to 20%. Several other countries have also reduced their corporate tax rates. Economists this rising trend of reducing company taxes to increase investment as tax competition.

Or in other words, Tax Competition is the process by which countries, use tax cuts, tax breaks, etc., to attract investment.

Table: Major tax revenues of the centre – Budget 2019 (July)

Tax Amount (Rs crores) Percentage share in total tax revenue
Corporate Income Tax 766000 30
GST 663343 26
Personal Income Tax 569000 22.3
Union Excise Duties 300000 11.75
Customs Duties 155904 6.1
Gross Tax revenue of the centre 2552131 100

Altogether, the new tax rate may work to encourage the corporate to make further investments. Th effect of the tax rate cut can be read from the stock indices. Following the tax cut announcement, the market expressed its joy and excitement by registering nearly 2000-point rise in the BSE Sensex.

In addition to the tax cut, the Finance Minister also announced tax exemption for buyback of shares by listed companies.

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