Nirmala Sitharaman Press Conference: Government Slashes Taxes For India Inc. In Unexpected Move

Finance Minister Nirmala Sitharaman today proposed to cut corporate tax rates for domestic companies to 22 percent and new domestic manufacturing companies to 15 percent.

Here are the key highlights from her press conference in Goa, ahead of the GST Council meeting:

• Effective tax rate for companies will be 25.17 percent, inclusive of all surcharges and cesses.
• Domestic firms will have the option to pay income tax at 22 percent if they don’t avail any exemptions, incentives.
• The corporate tax cut, aimed at spurring growth, will be implemented through an ordinance.
• Domestic companies will not have to pay minimum alternate tax.
• No tax surcharge on capital gains on sale of securities, including derivatives in the hands of foreign portfolio investors.
• No tax on listed companies’ share buybacks announced before July 5, 2019.

Watch BloombergQuint’s Detailed Coverage On Today’s Corporate Tax Cut

Nirmala Sitharaman is set to speak to the press today at 10 a.m., ahead of the 37th Goods and Services Tax Council meeting in Goa. The finance minister will also hold a press conference later in the day to announce the outcome of the meeting.

The GST Council today may discuss measures to reduce evasion under the new indirect tax regime even as major rate revisions have been ruled out by a panel of officers.

To check rampant misuse of input tax credit and issuance of fake invoices to reduce payment of tax, the GST Council is set to finalise a system which will restrict facility to avail input credit above a certain threshold for certain taxpayers, said a tax official speaking on condition of anonymity. A system will be put in place that will flag exorbitantly high sales made by new firms as soon as they are incorporated.

Here are the other measures the council is set to consider, according to PTI:

• Consider giving relief to small businesses with turnover up to Rs 2 crore from filing annual returns for 2017-18 and 2018-19. This will cover about 85 percent of the 1.39 crore total assesses.
• Consider introduction of a special composition scheme for taxpayers supplying brick kilns, sand mining activities and stone crushers with an increased rate.
• Discuss amendments in GST Laws to accommodate creation of Jammu and Kashmir and Ladakh as union territories and will also discuss the proposal moved by Kerala on introducing e-way bill system for movement of gold and precious stones.
• Deliberate on the proposal of linking new GST registration with Aadhaar and take the quarterly review of cases at National Anti-profiteering Authority.

Tata Motors yesterday exuded confidence in the government taking a positive call on the auto industry’s demand for a tax cut on vehicles at today’s GST Council meeting.

The automobile industry, which saw the steepest volume plunge in August in nearly two decades, has long been demanding lowering of GST on automobiles to 18 percent from the present 28 percent to boost demand.

“The auto industry can live with or without GST rate cut but an announcement (on whether the taxes are going to be lowered or not) is needed,” Guenter Butschek, managing director and chief executive of Tata Motors, said.

There have been demands pouring in from various sectors — from biscuits to automobiles and FMCG to hotels — to reduce tax rates in the wake of economic slowdown.

The argument propagated has been to boost the consumption and domestic demand by reducing GST rates further.

However, many of the states are of the view that it would not be tax prudent to allow GST rate reduction at this stage, as the compensation cess fund, which is utilised to compensate the states under the GST Act in case the revenue is below the targeted growth rate, has turned negative.

According to sources, the GST Council’s Fitment Committee, which comprises revenue officials of both centre and states, has rejected demands for a cut in tax rate on items ranging from biscuits to car, owing to tight revenue position.

Fitment panel in its report, which will be placed before the GST Council, has some good news for hotel industry as it has recommended raising tariff ceiling to up to Rs 12,000 per night under 18 percent GST slab.

At present, 18 percent GST rate is applicable for hotel tariff up to Rs 7,500 per night.

The committee also rejected the telecom ministry’s proposal to reduce GST rate for telecom services from the present 18 percent to 12 percent, the sources said.

It was also decided not to tinker with the present GST structure for biscuits, bakery products, breakfast cereals, fruits and vegetables, mineral water, ready-to-eat packaged items, and several other food products.

The committee rejected the proposal of reduction in GST rate on sale of cruise tickets, which attracts GST of 18 percent, the sources added.

The GST Council Meeting comes at a time when the government is grappling to boost India’s gross domestic product growth from a six-year low. Consumption, demand, lending and investment have taken a hit due to multiple reasons, both domestic — falling rural income, a cash crunch emanating from the IL&FS crisis, risk averse banks — and international — the U.S.-China trade war and a global slowdown.

Sectors all across the economy, especially automobiles, real estate and consumer durables, have been hit by the slowdown.

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Finance Minister Nirmala Sitharaman today proposed to slash corporate tax rates for domestic companies and new manufacturing companies ahead of the 37th GST Council Meeting.

The changes in taxation will be made through ordinance, Sitharaman said. This has been done in order to promote growth, she said.

First provision inserted in Income Tax Act with effect from fiscal year 2019-20 :

• Any domestic company will have option to pay income tax at 22 percent if they don't avail any exemptions or incentives from FY20
• Effective tax rate for these companies will be at 25.17 percent inclusive of all surcharge and cesses
• Companies will not have to pay any Minimum Alternative Tax

Second provision has been inserted in the Income Tax Act with effect from fiscal year 2019-20:

• To attract fresh investments and boost Make In India, any new domestic mfg company incorporated after Oct 1, 2019 has option to pay 15 percent tax. This is also applicable to companies which don’t avail any exemptions.
• Effective tax rate for these cos will be 17.01 percent including of surcharge and cesses, and will not have to pay any MAT
• Applicable for domestic manufacturing company which begin manufacturing before March 2023.

Third provision has been inserted in the Income Tax Act with effect from fiscal year 2019-20:

• Companies enjoying tax holidays will have an option to avail the new corporate income tax rates after the expiry of tax holiday
• Once new tax rate is availed, no changes can be made

Indian equity benchmarks witnessed a sharp surge after a shaky start after the government plans to cut corporate tax rate for domestic companies.
The S&P BSE Sensex surged 900 points to 36,723 and the NSE Nifty 50 rose as much as 1.6 percent to trade near 10,900. Read More

In order to stabilise flow of funds in capital markets, increased surcharge in this year's budget shall not apply on capital gains made through sale of equity share in companies liable for STT (securities transaction tax) in the hands of individuals, AOP (association of persons), Sitharaman said.

Enhanced surcharge to not apply to not apply to capital gains arising on sale of any security including derivatives in the hands of FPIs.

In order to provide relief to listed companies which have already made a public announcement to buyback shares before July 5, 2019, it’s provided that tax on buyback of shares in case of such companies, shall not be charged, the Finance Minister said.

The government has decided to expand to spend CSR (corporate social responsibility) of 2 percent on incubators run by state or central governments, public sector undertakings, contribution to public funded universities, laboratories, etc. engaged in scientific research.

This change will be made in the Companies Act, while the previous changes will be made in the Income Tax Act, she clarified.

However, the economic buoyancy brought about from the reduction of these rates will make up for the loss in revenue, Sitharaman said. Also, when tax rates are reduced it is a given that the tax basket expands, she said.

Pranav Sayta, partner at EY, called today’s announcements a “real bold move”.

All companies will benefit significantly from the move, he told BloombergQuint. This will put more money in the hand of corporates, enabling them to invest much more, he said.

It will give a boost to private investment, consumption and from a perception and sentiment standpoint, this is a fantastic move, he said.

Subbu Subramaniam, chief financial officer of Titan Company Ltd., welcomed the announcements, saying lower tax rates will make investment returns much higher.

“People who start manufacturing companies after Oct. 1 will have an even lower tax rate,” he said. “This is a great incentive for manufacturing, great to get new jobs. This is a great move.”

The company’s effective tax rate—currently at 29 percent—will fall to 25 percent, Subramaniam said. “This also gives us freedom to do business the way we want, in terms of where we want to put up factories and so forth.”

Indian equities are expected to sustain and inch higher on the back of the latest announcements by Finance Minister Nirmala Sitharaman, according to Chakri Lokpriya managing director and chief investment officer at TCG Advisory Services.

The government has taken a meaningful stake by reducing the tax rate, which will allow many companies to undertake certain capital expenditure plans. With the corporate tax rate going down, consumer facing companies will also benefit, Lokpriya told BloombergQuint.

Today’s measures will enable India Inc. to either reduce prices or make new capital investments, said the chairman of India’s largest automaker.

“New investors who are coming in have to pay a lower tax rate. That’s something that has never existed,” he told BloombergQuint.