The government's latest measures appear to be created to push growth through an increase in investment rather than consumption. "It is a real game-changer and the government should revisit personal taxation as well", TVS Motor Chairman Venu Srinivasan said soon after the Finance Minister Nirmala Sitaraman made the blockbuster announcement in Goa.
Domestic companies will pay 22% tax on their income from April 1, 2019, versus 30% previously, Finance Minister Nirmala Sitharaman said Friday. The effective tax rate for existing units, after considering surcharges and cess such as Swachh Bharat cess and education cess - which are levied on top of the income and corporate tax rates, will be 25.17 per cent as compared to 34.94 per cent now. This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March, 2023.
The corporate tax rate in the USA is 27 percent, in China it is 25 per cent, while in Malaysia it is 24 per cent. Singapore's corporate tax rate is 17 per cent.
With these measures, the government has moved India's corporate tax rates in line with its regional competitors, increasing the country's attractiveness as an investment destination. Among the large players, Apple is planning to invest in a new plant to make Apple products like iPhones.
Corporate tax rate cut to awaken animal spirits of economy : India Inc
However, that does little to assuage market fears, as the government has broken the shackles and gone ahead and is spending. The effective new rate will be 25.2% including all additional levies and is applicable only for companies.
"The move will make Indian companies globally competitive, and allow global companies a good option for growing their manufacturing base in-country", said Mukesh Aghi, president of the US-India Strategic Partnership Forum.
The risk India will miss its fiscal deficit target of 3.3% has increased significantly as tax revenue growth is already weak, ratings agencies and economists said. However, lower tax rates for new manufacturing firms will put existing firms at a disadvantage.
Indian newspapers hailed the tax cut.
Here is the full text of the finance ministry's statement: The Government has brought in the Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. "They look at different aspects, including ease of doing business, economic condition, domestic demand, labour among others", said trade economist Biswajit Dhar of Jawaharlal Nehru University.
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"The Finance Minister's mega corporate tax stimulus is a major move to boost investors sentiments, encourage manufacturing and awaken animal spirits in the economy".
Sitharaman said the revenue foregone on reduction in corporate tax and other relief measures will be Rs 1.45 lakh crore annually. "These tax rates take us closer to the tax rates which prevail in this part of the world". It has two important effects.
"Additionally, lower Central tax collections will impact the states' fiscal situation as well through likely cuts in central tax devolution, and borrowing constraints may necessitate state government expenditure restraint or deferral", she said.
She lowered effective corporate tax further for domestic firms incorporated on or after October 1 to 17%, with the condition that they begin production by March 2023.
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