The 37 Council meeting chaired by Union Finance Minister Nirmala Sitharaman on 20 September concluded with various amendments in tax laws including tailoring of corporate tax rates from 30% to 22%. The reform is the breeze of relief for India in this stressed economy. Depressed GDP (current 5% from 8% a year ago), on the other hand, is freezing down industries such as the automobile industry, real estate and FMCG. On this, the corporate rate cut may give a booster shot to such industry players by adjusting corporate tax rates on the surface with prevailing tax rates in other countries. By cutting down the corporate rates, the government itself has abandoned Rs. 1.45 lakh Crores in tax revenues.
Earlier to the reform, corporates with annual gross earnings of Rs 400 crore were paying 25 per cent tax, whereas other firms with turnover above that threshold paid 30 per cent, which effectively summed to 35 per cent once surcharges and education cesses were inserted.
As per recent provisions, corporates are required to surrender only 22 per cent of their annual turnover effectively 25.17 per cent (after surcharges), as they receive no exemption benefits.
Big news for start-ups, new businesses related to manufacturing and registered after October 1 this year, will give 15 per cent taxes only on the condition to outset their operations in less than four years, that is, before March 31, 2023.
The corporate tax cut is the reason for the celebration in companies as they are expecting to retain comparatively a larger sum of money (profit from sales). As estimated by Crisil, around 1,000 companies would nearly save Rs 37,000 crore annually from the tax cut.
The reform will benefit companies in three ways:
- Companies could draw the excess cash back into their businesses which further can be utilized to buy assets for the company.
- Happy corporates will pass on the benefits in the form of discounts and gift vouchers on consumer goods, automobiles and real estate.
- They might choose to reward shareholders with higher dividends.
With such amendments, the government is looking for a fresh kick start in India’s static economy. Amitabh Kant, CEO of NITI Aayog, in his conversation with one of the influential newspapers, revealed that “The government has passed on the tax benefits to corporates. Now it’s their responsibility to bring back the demand,” said. “Companies have to come back with animal spirits.”
As the people are set to cherish the string of festivals in October, the corporate tax cut companies are already offering discounts on their products. Till now companies were having a tough time because of the tremendous fall in profits.
Although the current provisions will not be of much relief to the worried economy still to an extent it will bring solidarity in businesses and boost corporate profits. There are possibilities of higher foreign inflow into equities and outflows from the debt segment.
Let’s see what views the experts have to share on the corporate tax rate cut:
- R.C. Bhargava, chairman, Maruti Suzuki and Pawan Goenka, MD, Mahindra & Mahindra said that the tax benefit would be beneficial to the consumers but not to a wider extent.
- Adi Godrej, chairman, Godrej Group said that the tax cuts will not leave enough margin for companies to highly benefit consumers.
- “We can’t let the prices go down by over 5 per cent, because real estate is taxed both at the buyer’s and the seller’s side,” says Niranjan Hiranandani, MD, Hiranandani group.
It seems that the government has stressed only the supply side whereas the demand side still remains behind the curtains. They still need to work on letting adequate money in the consumer’s hand so that they are capable to spend and this can be done through various tax cuts and in creating more job opportunities.
