How revised corporate tax rates are going to boost India's economy


Hon. finance minister Nirmala Sitharaman announced some major changes in corporate tax. Indian stock market broke records after the announcements. Through this article, we will go deeper into how the new reforms are going to impact the Indian economy.

The economic slowdown was evident in the June quarter. Extremely low numbers were registered across all the sectors and there was consistent pressure on the government from the opposition as well as common people to address the issue. A couple of days ago, the Finance Minister hon. Nirmala Sitharaman surprised everyone by announcing the rate cuts on corporate tax. As a result, the numbers in the Indian stock market skyrocketed. Several companies saw an unexpected rise in their shares including some leading automobile manufacturers.

What is a corporate tax?


So before we start talking about how the new rates on corporate tax will impact the Indian economy positively (or negatively), let's understand what corporate taxes are. The government imposes a tax on the net income of companies and this is what we call a corporate tax. All the companies whether they are public or private and are registered under the companies act 1956 are liable to pay this tax.

What has changed?


The basic tax rates are bought down to 22% from 30%. The new manufacturing companies have an added advantage as they are supposed to pay only 15% as tax on their net income. Earlier the rate was 25% of the net income. This applies to all the new manufacturing companies which are starting production from 1st October 2019 and will remain the same until March 2023. The new rates in the case of domestic companies are applicable only if they are not seeking any incentives or exemptions. Companies availing exemptions can still pay a tax at the rate of 22% once the exemption period is over. The Minimum Alternate Tax is also reduced to 15% from 18.5% for the companies that wanted to use tax exemption.

The new effective tax rates


Before the revision, the effective tax rates were 34.90% including surcharge and cess. Now it's down to 25.17%. For the newcomers in the market, it's down to 17.1% from 29.12%.

What are the positives?


Now since the companies are supposed to pay less tax, their profit margins are going to rise. For example, a company that earned Rs 100, paid Rs 34.9 as tax. Now they are supposed to pay only Rs 25.17 only. That means they are about to save around Rs 9 more per 100 Rs which will ensure more investment from these companies. More investment, more revenue as simple as that. Foreign Direct Investment (FDI) which plays an important role in any developing economy is expected to rise after this step. The foreign companies that are looking for an alternative to China in this era of a trade war might find India a lucrative place to set up production units in. The companies that are leaving china due to trade war might show some interest in programs like 'Make In India'. With the rise in production, there will be millions of new jobs on offer and the export will rise too.

What are the disadvantages?


The Indian government is set to lose 1.45 lac crore rupees per annum in revenue. Corporate taxes contribute 21% of the total revenue that the government receives which is the highest among all the others. This will impact India's quest to reduce the fiscal deficit.

Conclusion


The share market has broken some records after the decision went public. The automobile sector which was under extreme stress saw some positive figures in the past two days and that shows the market has accepted this decision positively. One of India's greatest economist, Dr. Manmohan Singh suggested these rate cuts in the past an there was a demand for the same for the past few years. To observe the effects of this decision, we might have to wait for 6 to 8 months.


Comments

Author: DR.N.V. Srinivasa Rao25 Sep 2019 Member Level: Platinum   Points : 5

The author brought out the advantages and disadvantages of Corporate tax reduction in a detailed way. He explained the impact of this very clearly.
Decreasing the corporate tax is a very big boost to the industry and they can pass on that advantage to the customers so that their sales will increase and the profits will also increase as the volume will increase. The whole world is looking at India and they are waiting for a chance to come to India. Now, this step from the government will make them come. This may solve the unemployment problem to some extent and it will give encouragement to startups also as ancillaries to those big industries,
The people are not showing much interest these days to invest in shares or other instruments due to the poor performance and now this reduction may again encourage people to go for investment in those instruments also.
We should appreciate our Finance Minister for her timely action in trying to bring back the economy under control.

Author: Umesh26 Sep 2019 Member Level: Platinum   Points : 6

When Govt lowers the corporate tax then the main objective behind that is that the company would pass on some of these benefits to the customers by lowering the prices of the items they are manufacturing or producing. Only if this happens will the real effect in the demand market be seen. As soon as the companies start giving more discounts and price cuts the customers will start pouring in for buying the items. Some of the companies may not agree to reduce the prices indicating that they have to plough back the increased profit in the expansion or other programs of the company and in that case the benefit will not be coming down to the customer. If we see this corporate tax reduction from a longer perspective, the companies are going to benefit from it from this year onwards and even if they do not pass on the benefit to the customer this year they will be voluntarily doing it from the next year because there is a recessionary trend in the market and until and unless a company woos its customer by reducing the price or offering freebies, its sale might not increase as expected after this tax reduction.

So there are many factors which boost the sale of items in the market and the basic rule of demand and supply always takes the precedence in the business environment. Sometimes the recessionary trends are global in nature and local measures taken to combat them might not prove helpful. Anyway the gesture of Govt in this regard is a welcome measure and we all hope that industries will look up and come out of this temporary set back soon.

Author: PRASHANT KUMAR26 Sep 2019 Member Level: Gold   Points : 2

The decrease in the corporate tax brings opportunities for the corporates to fix lower prices for the work they do for their customers. This helps in luring the customers or clients to invest more and more.

The foreign currency that comes to India will definitely help in boosting India's economy. The reduction in corporate taxes encourages the new upcoming corporate organizations to work harder and make more money from their customers and clients.



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