The Finance Minister Nirmala Sitharaman’s festive bonanza is sure to bring cheer to India Inc. The much awaited cut in corporate tax rate will be a significant relief for the 7 lakh-odd companies in the non-manufacturing space, paying an effective tax rate at about 30 per cent. For the 1.3 lakh manufacturing companies, whose effective tax rate is currently about 27.8 per cent, the respite is lower but substantial enough to cheer the markets.

What’s the cut?

There are several parts to the FM’s corporate tax rate cut announcement.

One, the tax rate for all corporates is reduced from 30 per cent earlier to 22 per cent now. Inclusive of surcharge and education cess, the effective tax rate is down from 34.94 per cent to 25.17 per cent. But this is subject to the condition that they will not avail of any exemption/ incentive. Hence, the extent of impact for companies will depend on specific sectors and exemptions that companies currently enjoy.

Taking all exemptions into account, currently the effective tax rate for all listed companies works out to about 30 per cent. Of this, non-manufacturing companies that contribute about 63 per cent in total tax liability, have an effective tax rate of 30.5 per cent, while manufacturing companies have an effective tax rate of 27.8 per cent, due to various exemptions availed by them.

While the extent of relief will be different for these sets of companies, the impact is significant enough to give a big boost to India Inc. and markets.

Sector-wise, companies in the automotive or pharmaceuticals sectors may see lower respite as the effective tax rate is already about 24-25 per cent due to various exemptions the companies avail.

Companies in the FMCG, capital goods and steel sectors will see the maximum benefit as many of them have an effective tax rate of over 30 per cent.

Fresh investments

The second move by the FM is to boost fresh investment in manufacturing. For new companies incorporated on or after October 1, 2019, making fresh investment in manufacturing, the tax rate has been cut to 15 per cent from 25 per cent currently. Inclusive of surcharge and cess, the tax rate comes to 17 per cent. These companies will also not have to pay Minimum Alternate Tax (MAT).

India Inc. has been pushing for a reduction in the MAT rate. The FM has reduced the MAT to 15 per cent from the existing 18.5 per cent for those companies which continue to avail of exemptions.

IT companies that currently pay less than 25 per cent effective tax rate will benefit from the MAT reduction, if they continue to avail of exemptions.

Also read: Government slashes corporate tax to 25.17% for domestic companies