Govt reduces corporate tax to 22% and 15% for new manufacturing firms
Decision to expand the scope of CSR spending expected to promote PPP in R&D and help India move up the innovation ladder
To bolster growth, Union Finance Minister Nirmala Sitaraman announced a slew of measures that included slashing of corporate tax to 22 per cent for domestic companies and 15 per cent for new domestic manufacturing companies. In order to promote growth and investment, a new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income-tax at the rate of 22 per cent subject to condition that they will not avail any exemption/incentive. The effective tax rate for these companies will be 25.17 per cent inclusive of surcharge & cess. Also, such companies will not be required to pay Minimum Alternate Tax (MAT).
Terming it unprecedented and bold move, Vikram Kirloskar, President, CII, said, “Finance Minister’s mega corporate tax stimulus is a major move to boost investor’s sentiments, encourage manufacturing and awaken animal spirits in the economy. Cut in corporate tax from 30 per cent to 22 per cent without exemptions has been a long standing demand of industry and is an unprecedented and bold move by the government.”
Ajay Durrani, MD, Covestro India, added, “The recent change in corporate tax in India is a very positive and bold step taken by the government. Reduction in corporate tax to 25 per cent will spur the economic growth of the country in a big way and will also provide relief to domestic and manufacturing companies to a larger extent. With this positive step, the Indian tax level is now at par with the global tax level and will open doors for Indian companies to compete internationally.”
In order to attract fresh investment in manufacturing and thereby provide boost to ‘Make-in-India’ initiative, the Government will now allow any new domestic company - incorporated on or after October 1, 2019 making fresh investment in manufacturing - an option to pay income-tax at the rate of 15 per cent. This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before March 31, 2023. The effective tax rate for these companies will be 17.01 per cent inclusive of surcharge & cess. Also, such companies will not be required to pay MAT.
The decision to bring down tax rates for new manufacturing companies makes Indian tax rates competitive with other Asian countries thus incentivizing multinationals, looking for an alternative to China, to shift their manufacturing base to India. “With the kind of corporate tax rate cuts announced today, India now becomes a competitive market in the region with our rates similar to those prevailing in the ASEAN countries. FICCI is sure that this trigger will lead to a virtuous cycle of investments, growth and higher employment. We are grateful to the Finance Minister and the government for being bold and resolute in its approach towards the economy and addressing the problems in a very comprehensive and focused manner,” commented Sandip Somany, President, FICCI.
A company which does not opt for the concessional tax regime and avails the tax exemption/incentive will continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period. After the exercise of the option they will be liable to pay tax at the rate of 22 per cent and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of MAT has been reduced from existing 18.5 per cent to 15 per cent.
The Government has also decided to expand the scope of CSR 2 per cent spending. Now CSR fund can be spent on incubators funded by central or state government or any agency or public sector undertaking of central or state government, and, making contributions to public funded universities, IITs, national laboratories and autonomous bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.
“The decision to allow CSR funds to be used for supporting incubators set up by central and state governments as well as supporting Universities, autonomous institutions as well as research bodies that are publicly funded clearly indicates that the government wishes to promote PPP in scientific research and development and make India move up the innovation ladder," said Somany.
According to Finance Ministry officials, the total revenue foregone for the reduction in corporate tax rate and other relief is estimated at Rs 145,000 crore.