First of all, what is the corporate tax?
Corporate tax is the tax on Income – that is the profits of the companies.
About the tax rate cut
Finance Minister Nirmala Sitharaman recently announced the biggest corporate tax rate cut and reduced it by around 10% points. This is the biggest tax rate cut in the last 28 years. Now corporate tax rates slashed to 25.17 % with Surcharge and cess(22% Income tax +10% Surcharge + 4% health and education cess) . Which was earlier 34.94% ( 30% Income tax + 12% Surcharge + Health and education cess 4%).
And to further encourage investment in manufacturing and “Make In India” the corporate tax was slashed to 15% from the current 25 %. for a new company ( To incorporate on or after October 1, 2019, and starting operations before March 31, 2023).
How Corporate tax reduction will boost the economy?
Corporate tax rate cut announced while India is facing severe slowdown and GDP rate has reached to its 6 yrs low at around 5%. In this situation, the important question is how this slash in corporate tax rates will promote economic growth. Because by reducing the tax rates, the government is loosing 1.45 lakh crore revenue. So for the Government, the crucial task now will be to meet fiscal targets. Because a reduction in income and expense remaining the same may increase the fiscal deficit of India. However, the Finance Minister mentioned that there will not be any cut in spending as cut in expenditure would hurt final demand. So, in this situation, it will become crucial for the government to achieve fiscal targets.
However, the silver line is that tax cuts will encourage investment because companies will now have more surplus fund on hand to invest. Further, this step of tax cut also laid a milestone towards making India a tax haven like Mauritius and Hong Kong. The lower tax rate, @15% for newly incorporated companies will encourage foreign investment, and ” Make In India”..
Recently Reserve Bank Of India released Rupees 1.76 trillion to the Government by way of dividend as well as the release of part reserves. And this amount may help the Government to compensate for the loss of revenue due to the tax cut. Therefore, it is very important for the country that this tax reform actually turns out to be a game-changer for the Indian economy and should promote the investment in manufacturing, create demand and boost the GDP. Otherwise, it may lead to the situation of depression in the economy.
Therefore, the crux is that the Indian economy is facing the crucial time and the Finance Minister has taken a huge risk by reducing corporate tax. And as per the concept of risk-reward trade-off, the step has to turn out to be a success.