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Diwali Bonus by Modi Government : Biggest corporate tax rate cut
The biggest tax bonanza by the Modi Government by way of corporate tax cut for domestic firms was announced on 20th September, 2019. It was the bold decision to arrest the slowdown in the economy, to promote Make in India & to boost employment. New tax rate are made applicable from the current fiscal i.e., financial year from 1st April 2019.There are around 6 major benefits which can act as a catalysts for the liquidity & flow of money with the corporate, as under:
- A new section has been added in the IT Act to allow all domestic companies to pay income tax @ 22% without any exemptions/ deductions. In short, present Current corporate tax rate of around 30% (for around 0.70% Companies) or 25% (for around 99.30% companies) has been brought down to 22%. After surcharge & education cess, effective corporate tax rate for the companies would be 25.17% (as against existing rate of around 35%). A company which does not wish to opt for the concessional tax regime in order to enjoy their existing tax exemptions & deductions can continue old tax regime. However, they are given a choice to opt for new concessional tax regime any time afterwards.
Most important: Companies which opts for new corporate tax at 22%, would not be required to pay Minimum Alternative Tax (MAT). Even if the company doesn’t opt for new tax regime, new MAT rate would be 15% as against existing rate of 18.5%
- Corporate tax rate of taxation will be 15% for all new manufacturing companies incorporated on or after 1st October 2019 and commences their production on or before March 31, 2023. The effective tax rate after surcharges and cess would be around 17%.
Most important: There is no sunset clause for the tax rate of 15%. These companies too will not be required to pay MAT. New rates would be comparable with the lowest tax rates in South Asian region and in South East Asia.
- In order to stabilize the flow of funds into the capital market, the government has also provided that enhanced surcharge introduced by the Finance (No.2) Act, 2019 shall not apply on capital gains arising from sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for STT in the hands of an individual, HUF, AOP, BOI, AJP & FPI.
- Union Budget-2019 in July this year had made all listed companies liable to pay an tax on buybacks of shares @ 20% on distributed profit. A concession has been provided now to all the listed companies that made a public announcement of a buyback of shares before 5th July5, 2019. Few companies like Infosys, Wipro etc which had announced buyback programme will not be liable to pay this 20% tax.
- The scope of CSR expenditure of 2% has been widened now. Now this fund can be spent on incubators funded by central or state government or any agency or PSU 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.
All the eligible companies can now adjust the benefit in tax in their next installment of advance tax due on 15th December. Those who have already paid advance tax against their MAT liability can claim the refund while filing their income tax return. It would be better if the CBDT allows the adjustment of advance tax so paid by MAT companies to adjust it against their TDS liability It would ease liquidity of such corporate. Expected revenue loss to the Government Treasury pursuant to above announcement would amount to Rs 1.45 lakh crore annually. It is expected that the government will move amendments in these two Acts during winter session of Parliament.
Whether the present tax can give much needed push to the economy?
During recessions, Government all over normally offers a tax cut as an economic stimulus package. The sensex has reacted positively and sentiments are equally high. Present tax cut can certainly improve liquidity & employment scenario as corporate would be left with more investible fund for growth and expansion. Present stimulus has taken care of the supply side management whereas demand side measure is missing. Present slowdown is lead by lack of demand and there is not much to cherish for individual taxpayers except waiver of surcharge on capital gain on shares. Unless and until, some incentives are announced for individual taxpayers, the demand would remain range-bound. Let us hope some tax benefit announcement in days to come for the individual taxpayers to stimulate the economy.
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