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India Cuts Corporate Tax Rates To Boost Growth

indiaoutlooksurvey july15 20sep19 lt

India's government on Friday announced a reduction in the corporate tax rate to boost a weaker economy that grew at the slowest pace in six years in the June quarter and prompted several companies to shed jobs massively.

The tax on income of domestic companies was lowered to 22 percent from 30 percent, Finance Minister Nirmala Sitharaman said. The effective tax rate after surcharge will be 25.2 percent versus 35 percent earlier.

The rate on new domestic companies, which will be incorporated after October 1 this year, was cut to 15 percent. Their effective rate will be 17.01 percent.

The new rate will take effect for the current fiscal year that started on April 1. The government has foregone a total revenue of INR 1.45 trillion or over $20 billion a year.

In July, the government had lowered the fiscal deficit target for 2019-20 to 3.3 percent of GDP from 3.4 percent projected in February. With the latest announcement, the government is likely to miss this target.

"We are conscious of the impact it will have on our fiscal deficit," Sitharaman said.

The minister also waived the buyback tax of listed companies that announced the scheme before July 5.

The Minimum Alternate Tax was reduced to 15 percent from the existing 18.5 percent for companies that continue to avail government exemptions and incentives.

In order to stabilize the flow of funds into the capital market, the minister scrapped the enhanced surcharge on capital gains arising from the sale of equity shares or equity oriented funds.

Further, the minister said the enhanced surcharge, dubbed the super rich tax, will not apply to capital gains arising on sale of any security including derivatives owned by foreign portfolio investors.

Fiscal loosening measures announced by Sitharaman are likely to provide a small boost to economic growth over the coming quarters, but significantly increase the chances of the ministry missing its budget deficit target this year, Capital Economics economist Shilan Shah said.

Reserve Bank of India Governor Shaktikanta Das welcomed the latest government measures.

At an event organized by Bloomberg News on Friday, Das signaled further rate cuts, saying low inflation provides room for policy manoeuvre.

The central bank has already reduced the rate four times this year to the lowest level since 2010.

Nonetheless, India's economic growth slowed to a six-year low of 5 percent in the June quarter. Earlier the RBI had projected real GDP growth of 6.9 percent for 2019-20.

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