India Slashes Corporate Tax Rates To Promote Investment

; posted on
September 24th, 2019

India has drastically reduced its corporate tax rates for domestic companies as part of a fiscal relief package designed to promote investment from both inside and outside the country.

Corporate tax rate reduction

Before Indian government announced the reduced tax rate, domestic companies were subject to base tax rate of 25 percent where turnover is less than INR 4,000 million (approx. USD 57 million). After considering surcharge and cess, the effective tax rate for such domestic companies ranged from approximately 26 percent to 29.12 percent.

Further, for domestic companies with turnover of more than INR 4,000 million, the base tax rate before the announcement was 30 percent. After considering surcharge and cess, the effective tax rate ranged from 31.20 percent to 34.94 percent.

In contrast, the new Indian ordinance provides an option to domestic companies, irrespective of the turnover, to be taxed at the base rate of 22 percent as long as the company does not avail of any tax exemption or incentive under Indian tax law. After considering surcharge and cess, the new effective tax rate works out to 25.17 percent. This will result in tax savings for domestic companies in the range of approximately 1–10 percent.

Moreover, for the new domestic manufacturing companies which incorporated in India on October 1 or later, such companies will be able to take advantage of a 15 percent tax rate instead of the regular 25% tax rate. Anti-abuse provisions have also been prescribed to ensure that existing companies do not avail of the concessional tax rate for brownfield investments by simply incorporating new companies and transferring the existing business to new companies.

The relief measures are projected to cost the government INR 1.45 trillion (about $20.3 billion) annually.

Minimum alternate taxation (MAT)

In addition to the reduction of corporate tax rate, India also introduced the MAT to deal with tax evasion. The MAT or book profit will apply in cases where book profit tax is higher than the tax under normal computational provisions. The base tax rate under MAT was 18.5 percent, and the effective tax rate ranged from 19.24 percent to 21.55 percent. Further, under the new ordinance, this measure shall not be applicable to domestic companies that have opted to be taxed at the reduced tax rate which has explained in the previous section.

Source: The Government of India

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