Govt Forgoes $20 Bn Revenue For Corporates, FPIs: This Is How It Will Be Beneficial

Amid flagging economy and the concerns of investors, the government has announced a new set of fiscal relief in an attempt to soothe the raging concerns. In the latest fiscal measures announced today (September 20), the government has slashed corporate tax rates to 22% for domestic companies and 15% for new domestic manufacturing companies.

The government has also introduced Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. In all the reliefs, the government said it is foregoing revenue of $20 Bn (INR 1,45,000 Cr).

The government in an attempt to stabilise the flow of funds into the capital market, has removed the enhanced surcharge introduced by the Finance (No.2) Act, 2019. The government said this increased surcharge shall not apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, HUF, AOP, BOI and AJP.

Saurabh Srivastava, chairman and cofounder of Indian Angel Network, said, “The Government’s decision to cut down the tax rates is bound to provide a radical spur to the corporate activities in the country. If implemented effectively, it will reduce the cost of capital which will result in a greater influx of funding into businesses. Indian companies stand to benefit greatly from this initiative.”

In a major support to international investments, the government has now said that 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 (FPIs).

Further, after receiving flak for tax on buyback of shares, the government said that the listed companies, which have already made a public announcement of buy-back before July 5, 2019, the tax on buyback of shares shall not be charged.

Here is a brief look at the other reliefs announced:

• A new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income-tax at the rate of 22% subject to the condition that they will not avail any exemption/incentive. The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
• Another addition is that any new domestic company incorporated on or after October 1, 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%. The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
• The Government has also decided to expand the scope of CSR 2 percent spending. Now CSR 2% fund can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertaking 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.

Aditya Ghosh, CEO, OYO India and South Asia said, “This is a bold step to provide a fillip to the Indian economy. Just ahead of the festive season, the honourable Finance Minister by reducing the corporate tax rates, has given a triple booster dose to the economy as this will increase the retained earnings of the companies which will result in investible surplus for the future, shift India at par with its regional peers thereby removing one of the issues related to manufacturing and exports and maintain macroeconomic prudence by continuing to stimulate the investment cycle.”

Earlier, in August Finance minister Nirmala Sitharaman has said the corporate tax rate for companies with over INR 400 Cr turnover will be gradually reduced from 30% to 25%, after the move drew criticism at the Union Budget.