Corporate tax cut to help boost economy, says FM Sitharaman
The Lok Sabha on Monday passed the Taxation Laws (Amendment) Bill, 2019 to replace the September 20 ordinance that sharply reduced corporate tax rates after a stormy debate in the house during which finance minister Nirmala Sitharaman said the decision was aimed at attracting investment to spur growth and create jobs.
She said the decision was a strategic one — to make India a competitive investment destinations for multi-national companies (MNCs) looking for an alternative to China amid the ongoing Sino-US trade war.
The government on September 20 took the historic decision through an ordinance that reduced the corporate tax rate for domestic manufacturing companies from 30% to 22% and for new manufacturing companies from 25% to 15% provided they forgo exemptions. The ordinance also exempted companies opting for the lower tax rate from paying the Minimum Alternate Tax (MAT); it also reduced MAT from 18.5% to 15% for companies that still wanted to avail it. The announcement was the fifth round of fiscal, administrative and policy measures to stimulate the economy since August 23 and the biggest one, involving a revenue implication of ~1.45 lakh crore.
Sitharaman, while introducing the Bill, said India was not the only country in Southeast Asia which has opted for lower tax rates. “The trade war between America and China is a prime reason. There were also indications that many multinational companies wanted to get out of China; we had all the reasons (to cut the rate),” she said.
She said any company incorporated after October 1 and investing in a manufacturing unit can opt to pay tax at the rate of 15%, as long as it does not avail any exemptions and starts production before March 31, 2023. With cess and surcharge this works out to an effective tax rate of 17.01%.
Sitharaman said the criticism that the government is not willing to listen is “absolutely unfair”. Her remarks come after industrialist Rahul Bajaj said that there was an “atmosphere of fear” and people were afraid to criticise the government. “We do take their criticism, many of them on my social media handle, call me names. I have no problems with that,” she said.
“We are a proactive government. I have met many people, many have said I am the worst finance minister, even before I completed six months of work, I hear them out. I am willing to hear more,” said Sitharaman.
“We’re called ‘suit-boot ki sarkaar’ again and again. We’re told that lowering corporate tax helps only rich. I want to tell them that corporate tax cut helps all small and big businesses registered according to Companies Act,” she added.
Before the September 20 decision, the lowest rate of corporate tax was 25% (for companies with a revenue up to ~400 crore), while other companies were paying 30%. That effectively worked out to 29.12% and 34.9% respectively, with cess and surcharge. Under the new regime companies can pay tax at 22% (they won’t be eligible for any exemptions, though), which translates into an effective tax rate of 25.17%.
The tax cut has been widely hailed by industry and experts — for helping Indian companies become more competitive. In an opinion piece in Hindustan Times, Sandeep Parekh, a partner at Finsec Law Advisors, wrote that the government decided to unshackle capital and entrepreneurship in one fell swoop with the move. “The move will increase profits at companies and thus mean more income for investors; it will allow more space in the medium term to invest in capital expenditure like building more factories...” he wrote.
According to official data released on Friday, India’s economy grew 4.5% in the second quarter ended September 30, 2019, the slowest growth since March 2013.
DMK MP A Raja said the government’s refusal to accept that there is an economic slowdown is compounded by its failure to deliver on promises of removing black money and creating jobs.
“The government should increase expenditure, instead of these rollbacks and amendments to its Budget promises,” said Congress leader Adhir Ranjan Chowdhury.