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How Nirmala Sitharaman’s corporate tax cut will help India? Understanding it in simple words

How corporate tax cut will help India to combat the economic crisis?

Indian Finance Minister Nirmala Sitharaman slashed effective corporate tax to 25.17 percent including all surcharges and cess for domestic companies. While making the announcement on Friday, FM said that the new tax rate will be applicable from the current fiscal (April 1). How Corporate tax cut help India to combat the economic crisis? Let us take a look.

The reduction in corporate tax in one of the many steps taken by the government to boost demand and investment after growth slowed to 5% in the last quarter. Slashed corporate tax has now put India on par with Asian peers. The move will is expected to boost the efforts of New Delhi to attract investments as companies are looking at alternative destinations to sidestep the supply chain which got affected by the US-China trade war.

Prime Minister Narendra Modi termed the move historic

Prime Minister Narendra Modi was in Houston for ‘Howdy Modi’ event yesterday and he declared the move historic. He wrote on Twitter, “The step to cut corporate tax is historic. It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve the competitiveness of our private sector, create more jobs and result in a win-win for 130 crore Indians.”

In another tweet, he wrote that India is not leaving any stone unturned to make the country a better place to do business, improve opportunities for all sections of society and increase prosperity to make the country a $5 trillion economy.

The aim of the government is to lift business sentiment and spur investments. The corporate tax is slashed from 30% to 22% for the Indian companies. New companies who invest in manufacturing would have to pay only 15% tax. A total of effective Rs 1.45 crore fiscal boost is what India government is offering. Markets jumped after a long slowdown, Indian companies were delighted after the announcement. Experts also gave a big thumbs-up to the decision.

Sensex recorded a record jump after the announcement

BSE benchmark Sensex gained the biggest single-day numbers in a decade after a sentiment boost. Sensex rose 5.09%, or 1837.52 points and reached 37,930.99 at 12 pm on the day of the announcement. Nifty also gained 4.92%, or 526.15 points and reached 11, 230.95. The new tax rate will be eligible for companies only if they forego incentives and exemptions in force. But even for those companies opting for the status quo, the minimum alternate tax (MAT) was cut from 18.5 % to 15%.
The companies will have the option of lower tax rate after the expiry of tax holidays and concessions which are being availed.  Once the new tax rate is chosen, going back to the concession regime won’t be an option. The government announced a number of measures after criticism mounted amid job losses and falling demand to lift the growth rates and revive sentiments in last month.

India’s move seems similar to the US and UK to combat the slowdown

India’s move is similar to the steps taken by the UK and the US to attract investments. India has tried to bring its tax rates to the lowest amongst the South East Asian countries. The effective corporate tax including 10% surcharge and 4% education cess will become 25.17% which was 34.95 earlier for companies who have turnover more than Rs 400 crore at present. Nirmala Sitharaman also indicated
about consultation with the commerce and industry ministry on reviewing import tariffs. RBI governor Shaktikanta Das said that the move from government is bold and welcoming. He said that new tax rates will take India closer to tax rates which prevail in this part of the world.

How it can help? 

1. The new tax rate for manufacturing companies will be 15% which will become 17.5% after surcharge and cess. Any new Indian manufacturing company which will be registered on 1st or after 1st October 2019, and starts its operation before March 31, 2023, can just pay 15% tax sans any exemption or tax holiday.

2. This will help India in attracting investors who are looking to shift out of China due to a US-China trade war. The new slashed tax rates might bring back textile sector which has moved to Bangladesh.

3. India being a neighbour of China, is considered as one of the beneficiaries of the trade dispute, but countries like Vietnam, Singapore and others have been the biggest gainers.

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What Economists are saying?

Economists say that the new move will boost the business sentiment but will be visible with few lags in investments. The vice president of ICRA, Aditi Nayar said that new announcement is expected to boost the business sentiment in immediate term with some impact on consumption and demand. However, fresh investment activity may be a little difficult. She expects Reserve Bank of India (RBI) to complement the measures with a 25 bps rate cut in the upcoming MPC review. Tax experts have expressed hopes on the government following up the move with tax outgo for individuals. If there is a similar tax reduction for common people, individuals might spend extra buck as the festive season is approaching, ultimately increasing the demand. Some of the people are saying that the new move is only going to help the big companies in increasing their own profit as they will save tax. It won’t have a big impact on the slowdown as it is not affecting the demand directly.

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