15% tax rate among lowest in SE Asia: Finance minister

PM used special power to bring ordinance

PANAJI: In one of its boldest economic initiatives - and easily one of the largest ever giveaways in India - the Narendra Modi government on Friday sought to reach out to investors and reverse the pessimism in India Inc with a massive Rs 1.45 lakh crore tax bonanza that will see the effective tax rate come down to 25.17% from 29.5% for companies that do not seek exemptions, and to 15% for manufacturing start-ups.Besides, finance minister Nirmala Sitharaman sought to “stabilise the flow of funds into capital markets” and announced removal of the additional 20% tax on listed companies that had announced buyback before July 5, when the provision was announced as part of the budget proposals.Separately, enhanced surcharge will not apply to capital gains on the sale of shares, units of equity oriented mutual funds or a unit of a business trust that faces securities transaction tax (STT) in the hands of high networth individuals, HUFs, association of persons and others.The surprise announcements — the fourth in as many weeks — came hours before Modi boarded Air India One for the US, where he will court global investors.With assembly elections due to be announced in states such as Maharashtra any day, the government had a small window before the code of conduct kicked in to rush the measures to revive the economy in the backdrop of a slowdown that saw quarterly growth rate moderate to an over six-year low of 5% during April-June.It did so by opting to promulgate an ordinance to usher in amendments to the Income Tax Act and the Finance Act, in what many billed as a “mini Budget”, which has de-fanged the charge about the government being in denial over worsening indicators.Poor performance of the economy had threatened to take the shine off Modi’s resounding victory in the Lok Sabha polls, while providing the opposition, still reeling under the May drubbing and the groundswell for radical decisions on J&K, with an opening to hector him.The decision came a day after the announcement of a scheme for generous disbursal of loans to farmers, retail borrowers and micro, small and medium enterprises (MSMEs). The sequencing of the measures makes political sense as Thursday’s measures can help buffer government against the charge, levelled by Congress and Left, that the corporate tax package marked largesse to big money and foreign investors.In any case, the summer verdict marked a repudiation of the ‘crony capitalism’ insinuation, and that must have given the government the required political reassurance.The finance minister was earlier scheduled to only chair the GST Council meeting, where a reduction in indirect tax rates on a limited set of items was to be discussed. But she and her top officials flew in early Friday morning after spending Thursday in a series of meetings, including with the PM, where the tax changes were finalised.Although the announcements will put pressure on the fiscal deficit target of 3.4%, especially due to the slowdown, the government decided to focus on the immediate need to revive investment and create jobs, over bridging the gap between spending and revenue, sources said.“The 15% tax rate is amongst the lowest in South East Asia,” Sitharaman told a news conference as government officials said it would make India an attractive destination for foreign investors, many of whom are looking at relocating or redistributing some of their manufacturing from China, which is in the grip of one of the worst-ever slowdowns in decades. In recent years, global investors have flocked to countries such as Vietnam, which has offered attractive tax rates and good quality infrastructure.As a possible counter, Sitharaman announced that the benefit of a lower tax rate would be available to manufacturing companies that are incorporated from October 1 and commence production by March 31, 2023. For them the effective tax rate would work out to 17% with the benefit of not having to pay minimum alternate tax (MAT).“The tax rate is very competitive for new companies. Look at where we were and what we were talking about, a reduction from 30% to 25%. This is very big,” said Frank D’Souza, who leads the corporate and international tax practice at consulting firm PriceWaterhouseCoopers.“Hopefully, this should result in a virtuous cycle of increasing investments, consumption and growth. The new tax rates also catapult India amongst the most attractive investment destinations vis-a-vis many Asean countries, making India well-placed to avail of investment opportunities in the global supply chains being disrupted due to the ongoing tariff war between US and China,” added EY national tax leader Sudhir Kapadia. Several countries are seeking to attract investments with Thailand too lowering its tax rate earlier this month.The finance minister’s announcement also signalled the government’s intent to clean up the existing taxation maze, which is full of exemptions, surcharges and cesses. So, existing companies that decide to do without the benefit of exemptions can get away by paying 22% corporation tax, with the effective rate working out to 25.17%.Budget numbers showed that of the over 8.3 lakh companies paying companies, around 41% or 3.45 lakh companies had effective tax rate of over 25% during financial year 2017-18, the latest period for which data is available. “The larger idea is to simplify, rationalise and make the process simpler. Exemptions will be progressively reduced,” Sitharaman said.Revenue secretary Ajay Bhushan Pandey suggested that for existing companies the tax burden will fall by nearly 10 percentage points since they face 34.94% tax, including cesses and surcharges. In case of the new manufacturing companies, the decline, he said, will be sharper from the current levy of 29.12% to 17%, which will be the effective rate.PM Modi used his special powers to bring the ordinance to amend the finance bill to cut corporate tax rates before leaving for the US. Section 12 of Cabinet rules empowers the PM to use the power of the Cabinet under special circumstances. Decisions so taken are required to be approved by the Cabinet later.