Corporate Tax cut 2019
20th September of 2019 can be marked as a historic day of 2019. This was the day when the finance minister- Mrs.Nirmala Sitharaman announced a corporate tax rate cut by huge numbers for both domestic and multinational firms. The biggest repercussion of this was seen on the stock exchange where the both the indices-nifty and Sensex had witnessed the highest rise in a decade.
The highlights of the 20th September announcement include the government slashing down the corporate income tax from 25% to 15% for domestic firms incorporated on or post 1stOctober and those which are likely to commence their production on or before 31st March, 2023. The minimum alternate tax (MAT) was also axed from 18.5% to 15%. The finance minister also went ahead to announce that the enhanced surcharge will not be applicable on securities and derivatives.
The tax cut poured in both appreciation and criticisms for the Modi Government. At the press conference, the finance minister had informed that this move was introduced to spur demand and reduce the recessionary conditions looming over the Indian economy. With the tax rate being cut from 30% to 22%, she also considers that there will be a spike in private investment which will increase employment avenues, give rise to economic activities and ultimately generate revenue. However, there are many pundits who question whether the government has the stomach to take risk- primarily the rising fiscal deficit. Last year, the government had made it very clear that their ‘lakshman rekha’ lies at 3% fiscal deficit and they would put their best foot forward to maintain this figure. With this new legislation, experts say that the fiscal map will have to be re-drawn to meet the revenue shortfall.
Rajeev Memani, a member of the Task Force articulates that the government has gone far ahead than what was expected. Puneet Dalmia, Managing director of Dalmia Bharat Group says that it’s a bold, substantiate step by the government which has revived sentiments and brought about liquidity in the market. A step in the right direction, which is a starting point to a new era is what Akhilesh Ranjan, Convener of the Task Force direct tax code thinks. Many in the private sector have considered it as a welcoming step as the private investment growth scenario has been poor since the last few years. Even manufacturing growth has been down despite Make in India as well as exports have been low.FMCG (Fast moving consumer goods) companies are most likely to gain from this legislation. There is a threefold benefit for these companies where there will be an EPS(earning per share) boost for both international and domestic players. Titan told exclusively to CNBCTV-18 that the incremental monetary benefit which they will receive from the tax cut will be passed on to the consumers. Thus, it’s a win-win situation. Lastly, the stock price movement will be given a 1% incremental EPS. As far as capital goods are concerned, investor confidence has boosted. Domestic players such as L&T, NDCC have witnessed a reduction in tax incidence. The consumers had also benefitted during the festive season as the tax cut gave the companies a bigger room to offer great discounts at margins. However, the metal and cement sector will not really see much of a benefit from this.
Nobel Laureate Esther Duflo states that the corporate tax is not an answer to deteriorating economic condition of India. In conversation with Business Today, she said that it will increase the public expenditure and make it effective enough to de-risk the poor from the perils of economic slowdown and resultant loss of livelihood. As per the Wire, revenue projections for FY20 is likely to fall short by at least 2 trillion which was communicated between the Ministry of Finance and the 15th Finance Commission. It is projected that this stride will worsen India’s progress in terms of human capital development due to the amount cut on social welfare schemes and even exacerbate the income and wealth inequalities. Along with the centre, even states are likely to lose 1.4 lakh crore rupees. A few people believe that though the corporate tax is going to change the private investment picture and revenue figures in the coming quarters, it is only a short term joy. In the long run, the benefits are limited. In fact, the common man or the ‘Aam Aadmi’ is not going to profit at any cost. Many pundits have addressed that the possible reasons behind the government axing the tax rates could be to bring more number of people under the tax radar. The motive was to raise the tax base with individual and corporate tax exemptions, which will increase the number of people filing e-tax returns, but also paying less tax annually. They feel that the government has assumed the same trick as that of the U.S economy, but what they failed to realize is that there is a world of difference between the two economies. The U.S economy largely comprises the organized sector, hence taxation begins at country’s per capita income. The conundrum with India is that it is dominated by the unorganized sector which generate low incomes. Thus, taxation begins at four times the country’s per capita income and larger number of businesses are below the taxable income. Lastly, tax cut benefits only 1% of the businesses.
There is a multitude of opinions regarding the new rejig in the tax system. Many favor this hoping that it would spur investment, revive demand and steer the wheel towards growth. However, many feel that the government is making yet another disaster post GST and demonetization, whose aftermath could be catastrophic. Now, only time can tell whether this legislation will be yet another step in the right direction leading us an inch closer towards a new India that our Prime Minister keeps inferring to, or will it be declared as another disaster which people claim will ruin the economy yet again.
The highlights of the 20th September announcement include the government slashing down the corporate income tax from 25% to 15% for domestic firms incorporated on or post 1stOctober and those which are likely to commence their production on or before 31st March, 2023. The minimum alternate tax (MAT) was also axed from 18.5% to 15%. The finance minister also went ahead to announce that the enhanced surcharge will not be applicable on securities and derivatives.
The tax cut poured in both appreciation and criticisms for the Modi Government. At the press conference, the finance minister had informed that this move was introduced to spur demand and reduce the recessionary conditions looming over the Indian economy. With the tax rate being cut from 30% to 22%, she also considers that there will be a spike in private investment which will increase employment avenues, give rise to economic activities and ultimately generate revenue. However, there are many pundits who question whether the government has the stomach to take risk- primarily the rising fiscal deficit. Last year, the government had made it very clear that their ‘lakshman rekha’ lies at 3% fiscal deficit and they would put their best foot forward to maintain this figure. With this new legislation, experts say that the fiscal map will have to be re-drawn to meet the revenue shortfall.
Rajeev Memani, a member of the Task Force articulates that the government has gone far ahead than what was expected. Puneet Dalmia, Managing director of Dalmia Bharat Group says that it’s a bold, substantiate step by the government which has revived sentiments and brought about liquidity in the market. A step in the right direction, which is a starting point to a new era is what Akhilesh Ranjan, Convener of the Task Force direct tax code thinks. Many in the private sector have considered it as a welcoming step as the private investment growth scenario has been poor since the last few years. Even manufacturing growth has been down despite Make in India as well as exports have been low.FMCG (Fast moving consumer goods) companies are most likely to gain from this legislation. There is a threefold benefit for these companies where there will be an EPS(earning per share) boost for both international and domestic players. Titan told exclusively to CNBCTV-18 that the incremental monetary benefit which they will receive from the tax cut will be passed on to the consumers. Thus, it’s a win-win situation. Lastly, the stock price movement will be given a 1% incremental EPS. As far as capital goods are concerned, investor confidence has boosted. Domestic players such as L&T, NDCC have witnessed a reduction in tax incidence. The consumers had also benefitted during the festive season as the tax cut gave the companies a bigger room to offer great discounts at margins. However, the metal and cement sector will not really see much of a benefit from this.
Nobel Laureate Esther Duflo states that the corporate tax is not an answer to deteriorating economic condition of India. In conversation with Business Today, she said that it will increase the public expenditure and make it effective enough to de-risk the poor from the perils of economic slowdown and resultant loss of livelihood. As per the Wire, revenue projections for FY20 is likely to fall short by at least 2 trillion which was communicated between the Ministry of Finance and the 15th Finance Commission. It is projected that this stride will worsen India’s progress in terms of human capital development due to the amount cut on social welfare schemes and even exacerbate the income and wealth inequalities. Along with the centre, even states are likely to lose 1.4 lakh crore rupees. A few people believe that though the corporate tax is going to change the private investment picture and revenue figures in the coming quarters, it is only a short term joy. In the long run, the benefits are limited. In fact, the common man or the ‘Aam Aadmi’ is not going to profit at any cost. Many pundits have addressed that the possible reasons behind the government axing the tax rates could be to bring more number of people under the tax radar. The motive was to raise the tax base with individual and corporate tax exemptions, which will increase the number of people filing e-tax returns, but also paying less tax annually. They feel that the government has assumed the same trick as that of the U.S economy, but what they failed to realize is that there is a world of difference between the two economies. The U.S economy largely comprises the organized sector, hence taxation begins at country’s per capita income. The conundrum with India is that it is dominated by the unorganized sector which generate low incomes. Thus, taxation begins at four times the country’s per capita income and larger number of businesses are below the taxable income. Lastly, tax cut benefits only 1% of the businesses.
There is a multitude of opinions regarding the new rejig in the tax system. Many favor this hoping that it would spur investment, revive demand and steer the wheel towards growth. However, many feel that the government is making yet another disaster post GST and demonetization, whose aftermath could be catastrophic. Now, only time can tell whether this legislation will be yet another step in the right direction leading us an inch closer towards a new India that our Prime Minister keeps inferring to, or will it be declared as another disaster which people claim will ruin the economy yet again.
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