New Delhi: In a major relief to India Inc, Union Finance Minister Nirmala Sitharaman on Friday slashed the basic corporate tax rate to 22 per cent from 30 per cent for domestic companies, provided they do not avail exemptions. The effective tax rate after adding cess and surcharge will be 23.17 per cent for these companies.
Sitharaman also announced reduction of corporate tax for new manufacturing firms, incorporated on or after 1 October 2019 and that start production before March 2023, from 25 per cent to 15 per cent. The move is aimed at boosting investment in manufacturing.
The reduction in corporate tax rate and other relief measures announced on Friday will cost the government ₹1.45 lakh crore per year, the finance minister said. The new tax rates will be applicable from the current fiscal, which began on 1 April.
Manufacturing being an important driver of growth, the new tax rates put India in a more competitive space against other emerging markets as far as attracting investment is concerned.
For instance, the current corporate tax rates in neighbouring Bangladesh, a fast emerging manufacturing market, is 25 per cent for publicly traded companies, according to a Deloitte report. Additionally, insurance companies, financial institutions, telecom operators, etc, are levied higher taxes on income.
Other markets such as Vietnam, Indonesia, Malaysia, and Myanmar have similar tax rates ranging from 20 per cent (Vietnam) to 25 per cent (Myanmar and Indonesia). Malaysia levies a reduced 17 per cent tax on domestic SMEs (valued at MYR 2.5 million or less) on first MYR 500,000 with the rest taxed at the normal rate of 24 per cent.
Similarly, companies listed on the Yangon Stock Exchange are taxed at a reduced rate of 20 per cent in Myanmar.
In China, the general tax rate stands at 25 per cent. However, special rates of 10-20 per cent apply for small-scale enterprises, according to the Deloitte report. "Tax rate is 15 per cent for new/high-technology enterprises, advanced technology service enterprises that perform qualifying outsourcing services and enterprises incorporated in certain regions and engaged in encouraged business activities,” reads the report.
In developed markets such as the United States, federal corporate tax of 21 per cent is levied. In the United Kingdom, 19 per cent tax is levied on corporates.
Manufacturing growth in India slumped to an abysmal 0.6 per cent in the June quarter of the current fiscal year compared to 12.1 per cent during the same period in the previous financial year. Moreover, the share of manufacturing in the gross domestic product (GDP) for the same quarter declined from 16.2 per cent in 2018-19 to 15.3 per cent in 2019-20.
The government is looking to arrest the slowdown as well as encourage investment in the sector with these measures. The latest reduction in taxes was received jubilantly by investors as the benchmark BSE Sensex and the broader Nifty witnessed substantial gains.
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