In her inaugural budget speech, Indian Finance Minister Nirmala Sitharaman proposed more corporate tax relief with the expansion of a lower rate to over 99 percent of companies.
The full fiscal 2019-2020 budget — the first budget since Prime Minister Narendra Modi’s second general election victory — proposes increasing the turnover threshold for the lower 25 percent corporate tax rate to INR 4 billion (about $58.3 million). On the other hand, a proposed surcharge increase would result in higher effective tax rates for high-net-worth individuals.
Sitharaman’s series of direct and indirect tax proposals, introduced alongside the Finance Bill 2019, were presented in a July 5 budget speech that ran over two hours.
“So far as corporate tax is concerned, we continue with phased reduction in rates,” Sitharaman said, recommending lowering the rate from 30 percent to 25 percent for companies with annual turnover of INR 4 billion. “This will cover 99.3 percent of the companies. Now only 0.7 percent of companies will remain outside this rate.”
In 2015 former Finance Minister Arun Jaitley proposed a gradual drop in the corporate tax rate, from 30 percent to 25 percent. India’s 2017 budget reduced the rate to 25 percent for domestic companies with turnover not exceeding INR 500 million in fiscal 2015-2016, which covered 96 percent of existing companies, according to the Finance Ministry. The following year, that rate was expanded to domestic companies with total turnover of up to INR 2.5 billion for fiscal 2016-2017.
Industry leaders meeting with government officials in pre-budget consultations had been pushing for a 25 percent rate for all companies, regardless of turnover.
Vikram Kirloskar, president of the Confederation of Indian Industry, welcomed the budget's reduced corporate tax rate for larger companies as “a good beginning” in a July 5 release, noting that “it is expected to provide a fillip to the corporate sector earnings which could be ploughed back in investment.”
Sandip Somany, president of the Federation of Indian Chambers of Commerce and Industry, expressed a similar sentiment, stating in a July 5 release: “While we are happy to note the decision to raise the turnover limit from Rs 250 crore to Rs 400 crore for companies that would attract a corporate tax rate of 25 percent, we had hoped that this rate will be applicable to all firms. Given the way tax policies are evolving globally, we need to be competitive if we are to attract and retain investments at a high level.”
Meanwhile, high-net-worth individuals face a heavier tax burden. Acknowledging previous measures alleviating “the tax burden on small- and medium-income earners,” Sitharaman stressed the need for higher-income earners to contribute more.
“In view of rising income levels, those in the highest income brackets need to contribute more to the nation’s development,” Sitharaman said. “I, therefore, propose to enhance surcharge on individuals having taxable income from 2 crore [about $291,000] to 5 crore [about $729,000] and 5 crore and above so that effective tax rates for these two categories will increase by around 3 percent and 7 percent, respectively.”
GST Adjustments
Looking to position India as “a global hub of manufacturing of electric vehicles,” Sitharaman noted that the government has moved the Goods and Services Tax Council to reduce the GST rate on such vehicles from 12 percent to 5 percent. Her speech highlighted other proposed measures, including the exemption of customs duties on select components of electric vehicles.
“Also to make electric vehicle[s] affordable to consumers, our government will provide additional income tax deduction of 1.5 lakh [about $2,180] on the interest paid on loans taken to purchase electric vehicles,” Sitharaman added. “This amounts to a benefit of around 2.5 lakh [about $3,640] over the loan period to the taxpayers who take loans to purchase electric vehicle[s].”
The Confederation of Indian Industry welcomed the GST rate reduction in its release, noting that it “is likely to provide a fillip to the movement towards a greener environment.”
Sitharaman further noted simplification measures that have been taken for GST purposes and advocated for an electronic invoicing system through which “invoice details will be captured in a central system at the time of issuance.” The system, which would roll out starting in January 2020, is expected to reduce compliance burdens, according to Sitharaman.