Corporate taxes slashed, Sensex zooms 1,921 points

Kolkata/Mumbai: Under mounting pressure of an acute demand dearth, investment slowdown, the six-year low economic growth and a 45-year high unemployment rate, the Narendra Modi 2.0 government on Friday slashed corporate taxes for companies by almost 10 per cent to 25.17 per cent. The fresh fiscal measures from Union finance minister Nirmala Sitharaman came two and a half months after she had presented her maiden Budget in early July.

Immediately after Ms Sitharaman’s announcement on Friday morning, the financial markets roared back to life, with the Sensex posting its biggest single-day jump in over a decade at 1,921 points, and investors’ wealth soaring by a staggering `6.8 lakh crores.

Ms Sitharaman, announcing the latest set of measures to jumpstart flagging growth, slashed the base corporate tax rate for existing companies to 22 per cent from 30 per cent; and for new manufacturing firms, incorporated after October 1, 2019, to 15 per cent from 25 per cent.

The corporate rate structure in India now stands at par with its Asian peers like China, South Korea and Indonesia. Interestingly, companies in China, South Korean and Indonesia pay 25 per cent tax, while those in Malaysia pay 24 per cent. Only Japan has a higher tax rate than India, at 30.6 per cent, while Hong Kong has the lowest, at 16.5 per cent. Singapore has a 17 per cent tax rate, while Thailand and Vietnam levy 20 per cent tax on companies.

The fresh dose of fiscal measures, which have gone down very well among industry and banking circles, will cost the government `1.45 lakh crores in lost revenue annually. It is also feared that it may potentially derail the country’s fiscal deficit roadmap. Significantly, Ms Sitharaman on Friday ducked all queries on its impact on the fiscal deficit, while announcing the new measures in Panaji, Goa, where a GST Council meeting is being held.

Then new structure will be put into practice with effect from April 1, 2019, on the condition that the companies will not avail any other incentive or concession such as tax holiday enjoyed by units in Special Economic Zones (SEZ) and accelerated depreciation. The effective tax rate for existing units, after considering surcharges and cess such as the Swachchh Bharat cess and education cess — which are levied on top of income and corporate tax rates — will be 25.17 per cent, as compared to 34.94 per cent now. For new units, it will be 17.01 per cent as opposed to 29.12 per cent now.

The finance minister hoped that the latest measures will promote growth and investment. On its impact on the fiscal deficit, she only said the government is conscious of the impact this will have on its fiscal deficit, and will reconcile the numbers. She said no tax will be charged on share buybacks by listed companies that announced such a move prior to July 5.

Also, the “super-rich tax” by way of enhanced surcharge on income, as announced in the July 5 Budget, will not apply to capital gains arising on equity sale or equity-oriented funds liable to securities transaction tax (STT), in order to stablise the flow of funds into capital markets.

In the new scheme of things, the companies will not have to pay minimum alternate tax (MAT). Any company that does not opt for a concessional tax regime and avails tax exemptions or incentives shall continue to pay tax at pre-amended rates. “The companies can opt for concessional tax regime after expiry of the tax holiday or exemption,” she said.

To provide relief to companies which continue to avail of exemptions and incentives, the rate of MAT has been reduced from the existing 18.5 per cent to 15 per cent. The mandatory two per cent corporate social responsibility (CSR) spending will include government, public sector undertaking (PSU) incubators and public-funded education entities.

Soon after these announcements, the bulls took over the financial markets. The 30-share BSE Sensex soared by 2,284.55 points to a peak of 38,378.02 intra-day, before settling at 1,921.15 points, or 5.32 per cent higher, at 38,014.62 at the close.

Similarly, the broader NSE Nifty zoomed 569.40 points, or 5.32 per cent, to end at 11,274.20. The market capitalisation of BSE-listed companies jumped to `145,37,378 crores, up from `138,54,439 crores on Thursday. The  Cash-market equity turnover on the BSE and NSE nearly tripled to nearly `90,000 crores, while the derivatives turnover also zoomed to about `2.4 lakh crores.

India’s business and banking circles were prompt to lap it up. Anil Agarwal, executive chairman of Vedanta Resources, said that the reduction of corporate taxes, including surcharges and cess, will significantly boost the economy and will provide a huge impetus for the manufacturing and infrastructure sector. “We are confident that this step, in coming days, will boost our economic growth so that GDP can attain its true potential of 8-9 per cent. The journey looks extremely bright for the creation of thousands of jobs in India and helping the country to march towards the $5 trillion mark,” he said.

State Bank of India chairman Rajnish Kumar said: “The large reduction in corporate taxes across the spectrum of all companies is perhaps the boldest reform in the last 28 years. Such a rate cut will boost corporate bottomlines, facilitate a reduction in product prices. Additionally, the move to incentivise setting up new manufacturing units in India comes at the most opportune time for foreign companies, that could be actively seeking opportunities to invest globally. This move could also materially lead to India effectively integrating with global supply chains and a huge boost to the Make in India campaign.”

Uday Kotak, CEO of Kotak Mahindra Bank, and Kiran Mazumdar-Shaw, chairman of Biocon, echoed similar positive sentiments. “Reducing the corporate tax rate to 25 per cent is a big bang reform. It allows Indian companies to compete with lower tax jurisdictions like the United States. It signals that our government is committed to economic growth and supports legitimate tax-abiding companies,” said Mr Kotak.

Ms Mazumdar-Shaw, who got engaged in a war of words with Ms Sitharaman on digital platforms, said on Friday: “The corporate tax rate cut from 30 per cent to 25.2 per cent will spur growth. This is a great move which will firmly revive growth and investment. My hats off to the finance minister for this bold but much-needed move.”

On the flip side, it will negatively impact the bond market as the revenue forgone due to tax rate reduction will make it difficult to stick to the fiscal deficit target, pointed out Suvodeep Rakshit, senior economist of Kotak Institutional Equities.