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Economy Market, industry, rupee beam following record corporate tax cut

Market, industry, rupee beam following record corporate tax cut

This is the biggest one-time reduction in corporate tax in the last 28 years, comparable to the epoch-making reform measure by the PV Narasimha Rao government in 1991

New Delhi/Mumbai: In a major fiscal booster, the government today slashed effective corporate tax to 25.17% inclusive of all cess and surcharges for domestic companies, boosting the market sentiment. Making the announcement, Finance Minister Nirmala Sitharaman said the new tax rate will be applicable retrospectively from the current fiscal which began on 1 April.

This is the biggest one-time reduction in corporate tax in the last 28 years, comparable to the epoch-making reform measure by the PV Narasimha Rao government in 1991, which created a till-then non-existing middle class with high purchasing power in the next two decades.

India had had the highest effective corporate tax rate of 38.05% in 1997, much as then Finance Minister P Chidambaram is often credited by the media for presenting a “dream Budget” that year.

Today’s reduction in the corporate tax rate to 25.17% is at par with other Asian countries such as China and South Korea but it comes at the expense of potentially breaching the 3.3% fiscal deficit target.

Today’s move also marks a departure from the anti-rich, typically socialist mantle the Narendra Modi government had donned for the past few years while ironically aiming to attain an economy of size $ 5 trillion.

Sitharaman said the revenue foregone on reduction in corporate tax and other relief measures would be Rs 1.45 lakh crore annually. This, she said, was being done to promote investment and growth.

In effect, the corporate tax rate will be 22% for domestic companies, if they do not avail any incentive or concession. The changes in the Income Tax Act and Finance Act will be made effective through an ordinance.

The minister said that companies opting for the 22% income tax slab would not have to pay the minimum alternative tax (MAT).

Sitharaman further said, new domestic manufacturing companies incorporated after 1 October could pay income tax at a rate of 15% without any incentives. This implies that the effective tax rate for new manufacturing companies will be 17.01% inclusive of all surcharge and cess.

Sitharaman further said that companies could opt for lower tax rate after the expiry of tax holidays and concessions that they are availing now.

Market euphoric

The market cheered the announcement with the BSE Sensex jumping by the most in a decade while the rupee also climbed against the US dollar.

In the fourth tranche of post-Budget economic stimulus measures, she cut base corporate tax for existing companies to 22% from current 30%; and for new manufacturing firms, incorporated after 1 October 2019 and starting operations before 31 March 2023, to 15% from current 25%. This will be subject to the condition that these companies will not avail any other incentive or concession such as tax holiday enjoyed by units in Special Economic Zones (SEZ) and accelerated depreciation.

The effective tax rate for existing units, after considering surcharges and cess such as Swachh Bharat cess and education cess – which are levied on top of the income and corporate tax rates, will be 25.17% as compared to 34.94% now. For new units, it will be 17.01% as against 29.12% now.

The new tax structure, which will lead to the government losing Rs 1.45 lakh crore in revenue annually, is effective from 1 April this year.

Prime Minister Narendra Modi termed the move as “historic” and said the announcements made in the last few weeks show that his government is leaving no stone unturned to make India a better place to do business. “It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win-win for 130 crore Indians,” he tweeted.

Companies in China, South Korean and Indonesia pay 25% tax, while those in Malaysia pay 24%. Only Japan has a higher tax than India at 30.6%. Hong Kong has the lowest corporate tax rate of 16.5% while Singapore has a 17% rate and Thailand and Vietnam levy 20% tax on companies.

Sitharaman said the latest measures will promote growth and investment, but sidestepped questions on its impact on fiscal deficit. “We are conscious of the impact all this will have on our fiscal deficit and will reconcile the numbers,” she said adding the changes in tax rate are being done by promulgating an ordinance to amend the Income Tax Act.

The government had budgeted Rs 16.5 lakh crore as tax revenue in fiscal to 31 March 2020.

Calling it a bold move, RBI Governor Shaktikanta Das welcomed the announcement.

With her maiden Budget seemingly failing to address issues facing the economy, Sitharaman has over the past one month announced measures in three tranches for different sectors of the economy including automobiles, banks and real estate.

Modi had on 5 July termed her maiden Budget as “citizen-friendly, development-friendly and future-oriented”.

India’s gross domestic product (GDP) growth slowed for the fifth consecutive quarter in April-June 2019 to 5%, the lowest in six years. This was on the back of faltering domestic demand, with both private consumption and investment proving lacklustre.

In response, her initial policy measures included support for market segments like automobiles, a rollback of capital gains tax on foreign investors, additional liquidity support for shadow banks, stressed asset fund to finance unfinished real estate projects and measures to boost exports. Accompanying structural reforms included a further easing of the foreign direct investment regime and consolidation of the public banking sector.

Market will see ‘animal spirits’ unleashed

The government’s decision to slash the corporate tax rate for companies will boost investors sentiments in the market, encourage manufacturing and awaken the proverbial animal spirits in the economy, as per India inc.

CII President Vikram Kirloskar said the cut in corporate tax from 30% to 22% without exemptions has been a long-standing demand of industry and is an unprecedented and bold move by the government. “The Finance Minister’s mega-corporate tax stimulus is a major move to boost investors sentiments, encourage manufacturing and awaken animal spirits in the economy,” he said in a statement.

This move also indicates that the government is adopting a tax stimulus route rather than using higher government spending route to help the recovery process of the economy, Kirloskar added. “Coming just ahead of the festive season, there could not have been better news as the entire country gets ready to celebrate,” he said.

India had had the highest effective corporate tax rate of 38.05% in 1997, much as then Finance Minister P Chidambaram is often credited by the media for presenting a “dream Budget” that year

Sharing similar views, FICCI said that these announcements will give a major boost to the “animal spirits” of corporate India and will reinvigorate the manufacturing sector that has been going through a difficult phase of late. With the kind of corporate tax rate cuts announced, India now becomes a competitive market in the region with our rates similar to those prevailing in the ASEAN countries, it added.

FICCI is sure that this trigger will lead to a virtuous cycle of investments, growth and higher employment, the industry body said. “The additional measures announced to stabilise the flow of funds to the capital market by not applying the enhanced rate of surcharge on capital gains arising from the sale of equity shares and units of equity funds is another major positive,” it said.

Property brokerage Investor Clinic’s group firm Home and Soul’s CEO Sakshi Katiyal said the announcement will boost the sentiments of the corporate sector. “Reduction of corporate tax will bring in overall positivity and growth at the grass-root level. I believe that the industry will utilise this gift in the most judicious way, and help boost the economy in turn,” she said.

Auto sector cheers move

Given that the automobile sector has been crying hoarse the loudest about a slump in the market of late, their response to today’s announcement was significant. Auto components industry body ACMA on Friday said the cut in corporate tax rate and other policy measures announced by the government would give a big impetus to domestic manufacturing and help attract investments in the private sector.

The auto component industry body, whose members account for around 2.3% of country’s GDP, said the policy measures announced at the onset of the festive season were expected to infuse positive sentiments in the market.

“Reduction in corporate tax to 22% for existing companies, 15% for new manufacturing companies and relief on account of MAT are steps in the right direction to give manufacturing, investments and economic activity a boost,” ACMA President Deepak Jain said in a statement. Expansion of scope of CSR expenditure to include incubation centres and public-funded institutions will also encourage R&D in the automotive industry, he added.

The auto component industry expects that the central government, in consultation with the sates, will also consider ensuring a uniform GST rate of 18% on all auto components. “Currently, 60% of auto components are (taxed) at 18%, while the rest are at 28%. A lower rate of GST will not only ensure better compliance but also help curb grey operations in the aftermarket,” Jain said.

The Automotive Component Manufacturers Association of India (ACMA) comprises of 800 manufacturers who account for more than 90% of the industry’s turnover in the organised sector. The sector reported a turnover of Rs 3,95,902 crore ($ 57.10 billion) in 2018-19.

Auto industry body SIAM has said the reduction in corporate tax rate and other announcements made by Finance Minister Nirmala Sitharaman would help give a boost to local manufacturing in the sector.

“The reduction of corporate tax to 15% for new companies making fresh investments from 1 October will support investment and also FDI in the auto sector. This is expected to give a big boost to Make in India for the automobile industry,” Society of Indian Automobile Manufacturers (SIAM) President Rajan Wadhera said in a statement.

Expansion of scope of CSR (corporate social responsibility) expenditure to include incubation centres and R&D activities will also help with expenditure in the automobile sector, he added. “All these set of fiscal measures are expected to uplift market sentiments and improve demand for automobiles,” Wadhera said.

Real estate to build on tax cut

Another segment of the market that had been crying foul since the formation of Modi 2.0 is the real estate. Today, that changed, too.

Realtors on Friday hailed the government’s decision to cut corporate tax, saying the move will have a ripple effect on all sectors including real estate, improve the liquidity of cash-starved developers and boost property demand especially in the commercial segment.

Realtors’ apex body CREDAI Chairman Jaxay Shah said: “It’s a full house blockbuster Friday for India Inc.! Game changer announcements. Market sentiment will change completely in all sectors including real estate”.

“It is a due corrective step by the Centre to uplift investor’s sentiment and prompt investment back in drying up the Indian economy. The move is well intended to revive growth traction of the economy,” said Niranjan Hiranandani, President, NAREDCO.

CREDAI President Satish Magar added: “The series of announcements by FM is most reassuring as they tell the government is sensitive to the economic needs of the people. We are most hopeful that the special needs of housing would soon get addressed to further accelerate the investment cycle.”

Property consultant Anarock Chairman Anuj Puri said: “This big-bang move will have a rippling impact on all sectors including real estate as it will encourage foreign institutional investors to invest in the country. As and when the overall financial health of the economy improves with these slew of measures, there will be heightened activity within real estate by both actual home buyers and investors alike.”

JLL India CEO and Country Head Ramesh Nair said the move is expected to bolster growth of industrial real estate development in the country. He said the reduction in MAT will help real estate developers engaged in SEZs and affordable housing.

Anshuman Magazine, Chairman and CEO, India, South East Asia, Middle East and Africa, CBRE, said: “The tax announcement is indeed a welcome measure and will definitely boost the Government’s ambitious Make in India programme.” The move would not only benefit the manufacturing sector but would also have a cascading impact on other sectors including real estate, he added.

Dhruv Agarwala, the group CEO of PropTiger and Housing.com, said: “Slowing consumption and falling private investment were both pulling down GDP growth. Today’s announcement to reduce corporate tax rates by almost 10% should help in kickstarting a fresh private investment cycle.” On the flip side, this decision would see the government’s fiscal deficit come under pressure and hence result in lower government spending, he added.

“However, overall this decision will have a positive impact on the economy because it will provide much-needed relief to corporates struggling with slowing consumer demand and will encourage them to once again start thinking about new investments,” Agarwala said.

Knight Frank India CMD Shishir Baijal termed it a “milestone effort” to kickstart the Indian economy and boost production. “This substantial direct tax reduction will allow more liquidity for the corporates that are currently assuming drastic measures to protect their profitability,” he added. These measures will complement the monetary policy measures taken by the RBI in increasing liquidity and consumer spending, he said.

“As a trickle-down effect of this, we should be hoping for a revival for the real estate sector as well. This boost will certainly accelerate demand for commercial spaces, but we understand that the financial stability expected will propel growth for the beleaguered residential market in the near future,” Baijal said.

Omaxe CEO Mohit Goel said this was a long-standing demand of the Indian corporates, including the real estate sector.

Ekta World Chairman Ashok Mohanani said the decision has brought in a ray of light for the economy and hoped that sentiments would change in the real estate sector as well.

Prashant Solomon, MD, Chintels India said: “For the Real estate sector this is an added benefit as it will encourage new entrants across the 200 ancillary industries that are essential to the sector’s growth.”

The revenue foregone by the government on reduction in corporate tax and other relief measures will now help companies focus on investing in areas which can fillip growth in their respective sectors, said Honey Katiyal, Founder of Investors Clinic.

Infrastructure consultant REPL CMD Pradeep Misra said the infrastructure industry, which was until now reeling under huge tax burden, will now eye foreign investments but also look forward to the domestic investors.

Taranpreet Singh, Tass Advisors Partner, said: “A pre-Diwali bonanza announced by the Finance Minister with primarily 2 objectives — firstly to promote industrial production and achieve the Make in India motive of the Modi-led government, secondly, to foster positive signs to the glooming stock market.”

Property brokerage firm Wealth Clinic director Amit Raheja said the corporate tax rate cut was much-needed relief for the developers which are facing a liquidity crunch.

Hinduja beams

Cheers were heard beyond the Indian market today. Leading British-Indian industrialist Gopichand Hinduja on Friday welcomed the reduction in the corporate tax rate in India, calling it “an excellent step” to revive the economy and manufacturing sector.

The co-chairman of the Hinduja Group said the government is well seized of the economic challenges facing it. “The current reduction in corporate tax announced by Finance Minister Nirmala Sitharaman is an excellent step that is needed for the Indian economy’s revival and (boosting) manufacturing sector,” Hinduja said in a statement. “I only wish more such steps which the government is already contemplating could be taken together in one go, like tapping the NRI investment, so as to create deeper impact, instil more confidence,” he said.

Hinduja said the tax reduction would certainly help put businesses back on track, generate employment and keep India as the principal destination for investments amidst global slow down.

Sitharaman’s colleagues hail decision

Hailing the reduction in corporate tax and other fiscal relief measures as “bold”, policymakers on Friday said the government’s decision has infused fresh energy into the industry and will boost economic growth.

Commerce and Industry Minister Piyush Goyal thanked Finance Minister Nirmala Sitharaman for the announcements. “I would like to thanks FM @nsitharaman for announcing cut to the corporate tax rate for all domestic companies which have been reduced to 22% from the current which was nearly 35%,” he said in a tweet:

Oil Minister Dharmendra Pradhan said the announcements have infused “fresh enthusiasm and energy” into the corporate sector.

Women and Child Development Minister Smriti Irani said the “landmark tax reforms” introduced by the government will give major boost to ‘Make in India’, promote growth and increase investments.

Minister of State for Finance Anurag Thakur said the step to cut corporate tax is historic. “It will give a great stimulus to #MakeInIndia, attract private invstment from across the globe, improve the competitiveness of our private sector, create more jobs and result in a win-win for 130 crore Indians,” he said in a tweet.

NITI Aayog Vice-Chairman Rajiv Kumar said the announcements are “a solid response to all the Cassandras”.

“I am thrilled at the announcements this morning by the #FinanceMinister. Heartiest congratulations to @narendramodi & @nsitharaman for the bold measures announced. Investor sentiments will get a big boost & the #economy will embark on a higher growth trajectory. Historical day,” he said on microblogging site Twitter.

In his comments, NITI chief executive officer Amitabh Kant said, “Brilliant move! Way to go! Will provide a major impetus to animal spirits.”

Meanwhile, State Bank of India Chairman Rajnish Kumar said the large reduction in corporate taxes across the spectrum of all companies is perhaps the boldest reform in the past 28 years. “Such a rate cut will boost the corporate bottom line, facilitate a reduction in product prices,” he said. Additionally, the move to incentivise setting up new manufacturing units in India comes at the most opportune time for foreign companies who could be actively looking for opportunities to invest globally, he said.

“This move could also materially lead to India effectively integrating with the global supply chain and a boost to Make in India campaign!” Kumar said.

FICCI President Sandip Somany said, “Lowering of income tax on corporates is a long-standing FICCI request.” He added that the measures will give a “boost to the animal spirits” of corporate India and will reinvigorate the manufacturing sector that has been going through a difficult phase of late.

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