In the wake of a possible economic recession, the Indian Government is taking desperate measures to evade the possibility. The latest announcement being a cut in Corporate Taxes for Domestic and New Manufacturing Companies.
Government announces a cut in Corporate Tax; Stock Market witnesses highest gains in a single day in the last 10 years. Sensex experienced a jump of 1700 points while Nifty witness a hike of more than 600 points.Sources
Cut in Corporate Tax
- The government announced a cut in Corporate Taxes for Domestic Companies to 22% from 30%. For the New Manufacturing Companies tax is reduced to 15% from 22%.
- Effective Tax Rate is 25.17% inclusive of all surcharges and cess for such domestic companies. These companies can also pay income tax at 22% if they don’t seek an exemption or incentives.
- Companies availing exemptions can opt to pay Corporate Tax of 22% after the exemption period is over. Such Companies are also not required to pay Minimum Alternate Tax.
- Enhanced surcharge announced in Budget shall not apply on capital gains arising on sale of any securities including derivatives in the hands of foreign portfolio investors.
- Capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for STT are also outside the bracket of enhanced surcharge.
- The govt expects to widen tax basket with a cut in corporate tax. The new tax rate will be applicable from the current fiscal which began on April 1.
Positive effects on Economy
- The announced cut in Corporate Tax would incorporate a multiplier effect on the Economy. It will increase liquidity in the economy and lower WACC (Weighted Average Cost of Capital).
- The reduction in taxes would lead to higher spending thus causing higher capital stock and higher capital formation. The reduction would help in decreasing tax evasion.
- This would also discourage companies from shifting to lower-tax jurisdictions.