Sept 20, 2019. A red-letter day in the history of Indian business and the Indian capital markets. Mega, unparalleled, path-breaking, big-bang… The adjectives will go on an on. The bottom line is that the stock market and the country has received one of the boldest policy thrusts seen in almost two decades. To put in perspective, the Nifty put on the single biggest gain seen in the last decade, surging close to 600 points, and stock market veterans couldn’t stop gushing over the “early Diwali” feeling.
Here’s a quick low down on the
big tax reform which India Inc had been waiting for, for many, many years. Corporate tax cut
A promise, first made by former finance minister late Arun Jaitley in 2015, of a 25 percent a corporate tax rate is now finally a reality in India. Companies, which don’t want to avail any exemptions, will now pay a lower tax of 22 percent. Including the surcharge and cess, the effective rate would be 25.17 percent. This benefit cuts across sectoral lines and companies from cement to soaps, from watches to jewellery to banking to manufacturing. Titan, in fact, told CNBC-TV18 that their tax liability will go down by 4 percent immediately in the new regime
New companies taxed at 15 percent
The most critical component of the tax bonanza is perhaps the decision to offer a concessional tax rate of 15 percent to companies incorporated after October 1, 2019, as long as they set up manufacturing facilities by March 31, 2023. This translates into an effective corporate tax rate of just 17.01 percent for new companies – a historic low for India.
Tax experts say this can really put the country on the global manufacturing map as manufacturing hubs like China operate at similar tax rates. “As trade war worries force global corporations to rethink their manufacturing blue-print, India could potentially attract a lot of investment at this attractive rate of 17% corporate tax,” says Dinesh Kanabar, founder of Dhruva Advisors.
The 17 percent tax for new companies can be a game-changer according to EY’s Sudhir Kapadia. “This could incentivize companies to set up subsidiaries for new businesses or projects and become even more tax-efficient”
Companies that enjoy tax deductions or exemptions are required to pay the minimum alternate tax. The rate of MAT has been lowered from 18 percent to 15 percent providing relief to all MAT paying companies.
Capital gains: No surcharge
For the stock market, capital gains remain a scary subject. However, the FM has offered relief and clarity here by declaring that enhanced surcharge will not be levied on capital gains arising out of the sale of shares or sale of units of equity mutual funds as long as securities transaction tax has been paid.
This effectively means that we go back to the pre-July 5 regime on capital gains where LTCG tax is applicable at an effective rate of 11.9 percent vs the 14.2 percent proposed in budget 2019 for high-income earners. Short term capital gains tax remains at 17.9 percent vs 21.3 percent, which had become the new rate post the passing of the Finance Act 2019. Revert back to old capital gains tax rates will be a welcome relief for capital market participants.
Partial relief in buyback tax
Another good news for investors is that companies, which announced buybacks before the Budget day of July 5, will not have to pay the buyback tax of 20 percent. This is good news for companies like Wipro and ends the confusion on whether on-going buybacks would be subject to the new tax.
Some moments and policy announcements end up being turning points in the history of a country and an economy. While Friday’s jubilation is indeed a very welcome relief from the sagging slowdown sentiment, the coming months will reveal whether this indeed is the turning point that heralds “ache din” for the savers, spenders and investors of India.