India has drastically reduced corporate tax rates for domestic companies as part of a fiscal relief package designed to promote investment from both inside and outside the country.
Effective for fiscal 2019-2020, domestic corporations will be able to opt for a 22 percent income tax rate, down from 30 percent, as long as they aren’t claiming any exemptions or incentives, according to a September 20 government release. Companies that elect this treatment will also avoid the minimum alternate tax, which has been reduced from 18.5 percent to 15 percent to aid companies that continue to use exemptions and incentives.
New domestic manufacturing companies will be able to take advantage of a 15 percent tax rate "to attract fresh investment in manufacturing and thereby provide [a] boost to [the] 'Make-in-India' initiative of the Government,” the release says. Reduced from 25 percent, this rate will be available to companies incorporating in India on October 1 or later that are making new investments in manufacturing, as long as they abstain from exemptions and incentives and begin production by March 31, 2023.
The relief measures are projected to cost the government INR 1.45 trillion (about $20.3 billion) annually, but Finance Minister Nirmala Sitharaman said she expects them to be revenue raisers.
“The idea is economic buoyancy will itself generate enough reasons for better revenue generation," Sitharaman said during a September 20 press conference. "The moment the taxes are brought down, you’re also expected to widen the basket, so that is another reason why I think we will definitely be having a positive impact on the revenue collection,” she said. She noted that the rate cuts put India on par with other jurisdictions in the Southeast Asian region.
Companies that want to continue enjoying exemptions or tax holidays can do so, and can opt into the concessional tax regime after the expiration of those benefits, Sitharaman said. But “an option, once exercised, cannot be subsequently withdrawn — that’s just to make sure that you can’t keep flip-flopping,” she said.
Among other measures to “stabilize the flow of funds into the capital market,” the government also announced September 20 that an enhanced surcharge introduced by Finance (No. 2) Act 2019 won’t apply to capital gains on a sale of a security, including derivatives, in the hands of foreign portfolio investors.
Gautam Mehra of PwC India called the new tax measures pathbreaking and said they “give India a competitive slot among the leading economies of the world in the corporate tax rate table.”
PwC India Chair Shyamal Mukherjee said he welcomed the step toward a softer tax regime, adding that the reduced corporate rate would boost the economy. “We can expect an uptick in the capex cycle now, and a revival of the economy looks imminent,” he said.
The developments follow a package presented in August responding to India’s economic slowdown. On August 23 Sitharaman announced that the country’s “angel tax” would be eliminated for registered start-ups and that a planned surcharge on long- and short-term capital gains would be abandoned.