The Narendra Modi government has taken a major step by giving a booster dose to the economy which has been facing slowdown of demand.
Finance Minister Nirmala Sitharaman made a big announcement that the corporate tax rate on domestic companies will be reduced to 22 percent from the present 30 percent. After this reduction, corporate tax rate in India would become comparable to any lowest tax country in Asia region.
Although the effective rate of corporate tax including surcharge will be 25.17 percent, it is far less than the effective rate of 35 percent earlier.
This rate would be applicable from the current financial year itself. Not only this, the rate of corporate tax on new manufacturing companies coming into operation from October 2019, will be reduced to meagre 15 percent, although the effective corporate tax rate with surcharge will be 17 percent. But it has to be kept in mind that these rates of corporate tax will be available with the condition that they don’t avail any concession.
Significantly, the corporate sector has been receiving several kinds of concessions in the country.
At one time it was such that the losses to the exchequer from these concessions were more than Rs 4 lakh crore and even after the rate of corporate tax was 30 percent (after surcharge 35 percent), the effective corporate tax was hardly 22 to 23 percent.
Even earlier government had reduced corporate tax in 2018, to 25 percent on companies with turnover less than rupees 250 crore and later in 2019 the same rate was extended to companies with turnover upto rupees 400 crores.
However, at the same time the condition was laid that the lower corporate tax would be applicable only on companies which forgo concessions.
This condition has also been placed on concessions in corporate tax rates announced on 20 September 2019.
This is indeed a welcome move, as it signals to investors that India's corporate tax rate is at par with any low-tax Asian country.
Presently, India's corporates were not ready to invest, despite huge amount of reserves at their disposal. Getting these funds invested has been a major challenge for the government.
It is worth noting that Indian corporates have an investible fund of at least Rs 15 lakh crore, which has not been invested for a long time. An unprecedented surge in the stock market following these announcements on September 20th, indicates that the corporate world will now start investing more due to lower rates of corporate tax.
There has been a worldwide panic after US President Donald Trump reduced direct tax rates in the US; and to somehow retain investments. Several countries have been moving towards lower corporate tax rates in the face of the challenge of increasing investment in their respective countries.
In such a situation, due to slow GDP growth for some time, there was pressure on Indian government to take some big steps to speed up the economy. This reduction in corporate tax rates has to be seen from that perspective as well.
On the other hand, we also have to keep in mind that there are many sectors of the economy that have been witnessing huge growth for some time, such as in e-commerce and tech-companies. But the matter of regret is that these companies are avoiding paying taxes either by showing losses or by underreporting their Indian earnings.
Currently, the exchequer will have to bear the loss of this huge reduction in the rate of corporate tax and the tax revenues will be reduced by Rs 1 lakh 45 thousand crore. In such a situation, it is imperative to tax e-commerce and tech companies.
This will not only compensate the treasury, but will also bring equity in tax implementation. In this regard, it would be good to levy a minimum alternative tax (MAT) or presumptive tax on e-commerce and tech companies.
(The writer is a National Co-convenor of Swadeshi Jagran Manch)