Corporate Tax Bonanza By Finance Minister Sitharaman

Dalal Street which was bleeding red since past few months finally got some rejuvenation on Friday. The Finance minister Nirmala Sitharaman gave a sigh of relief to the corporates and retail investors from tax regime in the fourth round of a series of measures that the government has announced in the past few months.

The tax relief which is addressed as the bonanza to domestic business and manufacturing firms makes the tax rate to be the lowest in Southeast Asia.

In response to these tax relief, all the major indices registered a decade's highest upward movement in a day. BSE Sensex showed a really of over 2,200 points and Nifty showed a 5% growth to settle at 11,274. The mid-cap index rose to 6.5 % and small-cap showed an upward movement of 4%.

Still wondering what made the market flooded?  In this article, we will be looking at the key takeaways from the changes made in the tax regime.

1. Reduction of basic corporate tax: The FM reduced the basic rate of the income tax rate from 30% to 22% on the domestic companies which do not avail any exemption or incentive. Effectively this rate will be 25.17% post surcharge and cess.  

The domestic companies will now have the option to pay tax at 30% with other exemptions and incentives or the company can opt to pay tax at a rate of 22% without incentive and exemption. 

Companies opting for a 22% rate of tax will also be exempt from paying Minimum Alternative Tax (MAT).

2. Boosting Manufacturing sectors:  The rate of tax has been reduced from 18.5% to 15% on manufacturing companies to boost manufacturing and promote ' Make-in- India' initiative of the government. Any domestic company incorporated on or after 1st October 2019 and making fresh investments in manufacturing will have the option of paying income tax at a rate of 15%. This also includes any companies which do not avail any exemption or incentive. 

The effective tax rate for these companies will be 17.1% including of surcharge and cess. These company will be exempt from MAT. 

Also, applicable to manufacturing companies which begins manufacturing before March 2023.

MAT is a mechanism introduced by the government to facilitate the taxation of companies which shows zero or negligible income for tax avoidance by taking undue advantage of depreciation, deductions and incentives. Under MAT such companies are made liable to pay a certain amount to the tax based on their book profits. 

3. Withdrawal of Surcharge: To Revive the capital markets and the faith of investors government has withdrawal the increased surcharge on the capital gains arising on the sale of equity share or units equity-oriented funds or unit of business trust liable to pay security transaction tax (STT) in the hands of investors ( except corporate investors). 

All individuals, HUF, AOP (Association of person), BOI (Body of individuals) and AJP (Artificial Judicial person) are exempted from the increased surcharge. 

The enhanced surcharge will also not apply to the capital gains of Foreign Portfolio Investor (FPI) arising from the sale of any securities including derivatives. 

4. No tax on buyback of Securities: The government has removed the tax introduced in the annual budget on buyback of share for the companies which have announced the buyback before 5th July 2019. 

The 20% tax on buyback of securities of the company will be imposed on all the other buyback (i.e. buyback announced after 5th July 2019).

5. Foregone Revenue: Sitharaman said that the total revenue forgone due to reduced corporate tax and other reliefs will amount to an amount of 1.45 lakh crore annually. 

All these actions and the ones which are already taken in the past few months shows how actively our government is working on the revival of the economy. This behavioral pattern of the government gives hope for the better days on Dalal street.