Impact of Changes in the Corporate Tax
The Indian government reduced the corporate tax levied on companies from 30% to 22%. Corporate tax is a direct tax that is levied on the net income or the profits which corporate’s generate from their businesses. This change will give a breather to companies and would leave more money in their hands for further investments and expansion.
What is Corporate Tax?
Both domestic and foreign companies are required to pay corporate tax on their net income or profits. While domestic companies pay taxes on their universal income (income generated from all over the world), foreign companies pay taxes on income generated only in India.
Changes in Rates of Corporate Tax
On September 20, 2019, the Finance Minister announced a reduction in rates of corporate taxes for domestic companies. In order to effect this announcement, a new provision would be inserted in the Income Tax Act.
The following changes pertaining to corporate tax were announced
Corporate tax rate reduced for a domestic company
- Domestic companies will now be charged a corporate tax rate of 22% as opposed to the earlier rate of 30%.
- The tax rate of 22% can be availed by domestic companies if they do not avail any of exemptions or incentives. Such companies will also be exempted from paying the minimum alternate tax. Minimum alternate tax is a minimum rate of tax which all companies are mandatorily required to pay irrespective of their income or profits.
- Companies that are currently availing any exemptions may pay the corporate tax rate of 22%, after their exemption period is over. For such companies, the rate of minimum alternate tax has been reduced from 18.5% to 15%. The effective tax rate including surcharge and cess, for such companies, would be 25.17%.
- The government would pass an ordinance affecting the new tax rates. Companies that are now availing of tax holidays may opt for a reduced rate after the expiry of such period.
Corporate tax for new manufacturing companies registered after October, 2019
For new manufacturing companies registered after 1st October, 2019 and which start production before March, 2023, the corporate tax rate shall be further reduced from 25% to 15%.
Taxation on sale of equity share
Enhanced surcharge introduced in the budget shall not be levied on the sale of equity shares which are already subject to the security transaction tax. Security transaction tax is a direct tax levied on each purchase and sale of securities which are listed on the stock exchange.
Implications of the Changes In the Rates of Corporate Tax
Low rates of corporate taxes are often a measure of attracting investments and consequently economic growth. The reduction in corporate tax will have the following implications:
- Domestic companies will now have more money in their hands and they would be able to spend this money in further expansion and growth.
- A lower corporate tax rate would be an incentive for companies to not avail of other exemptions.
- Removal of a minimum amount of tax for companies not availing of any incentives or exemptions will reduce the tax burden on companies to a great extent.
- Lower tax rates would also attract foreign investors to invest in domestic companies.
Reduction in corporate tax rates would go a long way in salvaging the economy. Reduced tax rates, would leave more profit in the hands of the promoters. It will also attract more investments. Apart from the reduction of the corporate tax, other measures such as elimination of MAT for companies not availing any exemptions/incentives and non-application of surcharge on the sale of equity shares will also help in making India a good business destination.
Written by Soumya Shekhar, legal writer @ Riverus