Sitharaman proposes to slash corporate tax for domestic firms, new local manufacturing cos through an ordinance.

In a major fiscal booster, the government on Friday slashed corporate tax to 22 percent without exemptions or incentives for the domestic and new manufacturing companies.

Companies opting for 22 percent income tax slab won't have to pay minimum alternative tax and after considering surcharges and cess, the effective tax rate will be 25.17 percent, said Finance Minister Nirmala Sitharaman.

This compares to 30 percent corporate tax rate currently, and an effective tax rate of 34.94 percent. Making the announcement, Sitharaman said the new tax rate will be applicable from the current fiscal which began on 1 April. She said the revenue foregone on reduction in corporate tax and other relief measures will be Rs 1.45 lakh crore annually. This, she said is being done to promote investment and growth. Meanwhile, domestic equity benchmark BSE Sensex skyrocketed over 1,600 points in the morning session on Friday after Sitharaman announced a slew of measures to revive the ailing economy. The 30-share index zoomed 1608.91 points, or 4.46 percent, to 37,702.40 at 11.30 am, while the broader Nifty rose 474 points, or 4.43 percent, to 11,179. The rupee extended the morning gains and rallied 66 paise to 70.68 against the US dollar soon after the announcement.

In effect, the corporate tax rate will be 22 percent for domestic companies, if they do not avail any incentive or concession. "In order to promote growth and investment, a new provision has been inserted in the Income Tax Act, with effect from the financial year 2020. It will allow any domestic company an option to pay income tax at 22 percent subject to the condition that they will not avail any exemption or incentives," she told reporters in Panaji. The changes in the Income Tax Act and Finance Act will be made effective through an ordinance. "To attract fresh investment in manufacturing and boost Make In India, new provision has been inserted in the I-T Act, which allows any new domestic company incorporated on or after 1 October 2019, making fresh investment in manufacturing, and starts operations before 31 March 2023, an option to pay income tax at 15 percent," she said. The effective rate for new companies would come to 17.01 percent after considering surcharges and cess subject to the condition that they do not avail any other tax incentive or concession such as tax holidays enjoyed by units in special economic zones (SEZ) or accelerated depreciation. This compares to the current base rate of 25 percent for new companies and an effective tax rate of 29.12 percent. Also, the companies will not have to pay minimum alternate tax (MAT). She said any company which does not opt for concessional tax regime and avails tax exemptions or incentives shall continue to pay tax at pre-amended rates. "These companies can opt for concessional tax regime after the expiry of tax holiday or exemption," she said.

Giving Minimum Alternate Tax relief to those opting to continue paying surcharge and cess, says @nsitharaman pic.twitter.com/XM9ObWD3w0 — CNBC-TV18 (@CNBCTV18Live) September 20, 2019

To provide relief to companies which continue to avail exemptions and incentives, rate of MAT has been reduced from existing 18.5 percent to 15 percent. Also, the super-rich tax introduced in Sitharaman's maiden budget on 5 July by way of a higher surcharge on income, shall not apply on capital gains arising on sale of equity shares in a company or business that is liable to pay securities transaction tax (STT). The enhanced surcharge shall also not apply to capital gains arising on sale of any security, including derivatives in the hands of foreign portfolio investors, she said. To provide relief to listed companies which have already made a public announcement of buyback of shares before 5 July 2019, tax on such buyback shall not be charged.

FM: In order to stablise the flow of funds into the capital market, it is provided that enhanced surcharge introduced in Budget of July 2019 shall not apply on capital gains arising on sale of equity share in a company or a unit of a equity oriented fund. pic.twitter.com/S3RmfcnY8n — ANI (@ANI) September 20, 2019

Sitharaman, however, sidestepped questions on the impact the concessions will have on the fiscal deficit target, saying that the government was conscious of the reality and will reconcile numbers.

With her maiden budget seemingly failing to address issues facing the economy and doing little to bolster growth that has slowed to a six-year low and check unemployment that has risen to a 45-year high, Sitharaman has over the past one month announced measures in three tranches for different sectors of the economy including automobiles, banks and real estate.

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

In response, her initial policy measures included support for the automobile sector, reduction in capital gains tax, and additional liquidity support for shadow banks. Accompanying structural reforms included a further easing of the foreign direct investment regime and consolidation of the public banking sector.

In the third part, last Saturday (14 September), she announced a stressed asset fund to finance unfinished real estate projects and measures to boost exports.

— With inputs from agencies

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