Finance minister Nirmala Sitharaman chose Goa, the location also for a GST Council meeting, to reveal her final card in the game to reverse a slowdown. In what is being now touted as a corporate Diwali ushered in by the finance minister, the market is cheering the developments applicable to small and medium companies.
Earlier in the Union budget 2017-18, former finance minister late Arun Jaitley had first reduced tax rates to 25 per cent for firms with a turnover of less than Rs 400 crore. Carrying forward the same legacy, Sitharaman on Friday further reduced the rates to 22 per cent for such companies and 15 per cent for all companies, big or small, initiating manufacturing this year.
But still, this time's announcement is special. "This is an out of the budget announcement and this will bolster the spirit of everyone to finish the year on a good note. It is a big morale booster for India Inc from Finance Minister Nirmala Sitharaman," said Chandrajit Banerjee, director general, Confederation of Indian Industries (CII), reacting to the development.
While the announcement has upped spirits of everyone, the disclaimers to the new corporate tax rate are being studied carefully. "Bigger companies may benefit very little from this. Even on the 15 per cent tax rate for new manufacturing units, one has to calculate and see the effective tax rates after currently available concessions are availed by manufacturers," said Sandip Somany, FICCI president and MD of Hindustan Sanitaryware Ltd.
Manufacturers said that the reduction in corporate tax for medium-size companies will promote local manufacturing as it can make even exports competitive from India. Sitharaman, too, had stressed this as a measure to give a push to the government's 'Make in India' initiative to promote local manufacturing.
"Slashing corporate tax rate to 25.17 per cent inclusive of all cess and surcharge would promote local manufacturing and bring about much-needed employment opportunities for all," said Kishan Jain, director, Goldmedal Electricals, a Noida-based switch maker. This could be the single biggest boost to his business of 40 years from the government, he concedes.
A reduction in MAT duties was welcomed by all classes of industrialists and investors in India. A major breather in the announcement was for large listed software companies TCS and Infosys who had announced a buyback of shares. The finance minister on Friday said that large listed companies announcing buybacks would now be exempt from levy of a share buyback tax.
"Elimination of MAT and removal of the additional surcharge from Foreign Portfolio Investors (FPIs) and individuals on capital gains are two welcome steps from the finance minister today," said Gautam Mehra, partner, tax and regulatory, PwC India.
More importantly, the finance minister gave an across-the-board relief from surcharges to companies on Friday ahead of attending a GST Council meeting in Panaji. "Enhanced surcharge will also not apply to capital gains arising on sale of any securities including derivatives of FPI," said Sitharaman, in what was a music to ears of foreign investors.
The finance minister's this year budget decision to impose a surcharge had gained criticism from FPIs who reacted by pulling out investments of more than Rs 7,000 crore from Indian markets in the six months after the budget. On Friday, during Sitharaman's announcement, stock markets zoomed to a 1,900 point rise and ended with a high of more than 1,800 points on the stock bellwether BSE Sensex.
Stockbrokers are calling this the largest single-day jump in the market in last seven years. However, bond market dealers were not so happy as bond yields of the benchmark 10-year bond of Government of India jumped by 24 basis points. "This in effect means that credit cost for the government goes up. Government's credibility on maintaining a fiscal deficit roadmap this year has taken a beating among bond investors," said Suyash Choudhary, head of fixed income, at IDFC AMC.
However, some bond traders opined that the rates could come down going ahead if the festive season can boost spends and therefore tax collections adequately. With Friday's announcement, the government declared it is foregoing Rs 1.45 lakh crore from its annual tax kitty.
The government has set a direct tax collection target of Rs 13.35 lakh crore for this fiscal year. In the budget estimate same was pegged at Rs 11.5 lakh crore and then Rs 12 lakh crore. To meet the higher target, tax authorities now have to collect Rs 7.85-lakh crore in six months, a growth of over 20 per cent.
"We have given some push. Now economic buoyancy will itself generate adequate revenue. The moment taxes are brought down, you will also expect to widen the basket. So, I believe it will have a positive impact on revenue generation," said Sitharaman, rejecting doubts on maintaining government's this year's fiscal deficit target at 3.3 per cent.
Even after the slashing of these corporate tax rates, India no longer remains one of the highest charging tax destinations (effective corporate tax rates of up to 45 per cent) to one of the more nominal ones in southeast Asia now, but still higher than many like Singapore (17 per cent), China (21 per cent) and Indonesia (22 per cent) in the region.
