Direct Tax Measures Announced by the Government

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In a significant development, the Indian Finance Minister introduced few sweeping investor friendly tax amendments to the Income-tax Act, 1961. Effective from FY 2019-20, these include:

(a)      Corporate tax rate for all Indian companies reduced from an effective rate of 35.94% to a significantly lower effective tax rate of 25.17% (as long as no tax exemptions/ holidays/ deductions are availed, even if available, such as those under section 10AA, section 35AD, Chapter VI-A etc.). On a base rate comparison of companies not availing any tax deductions/ holidays/ deductions today, this would result in a post Dividend Distribution Tax (“DDT”) investor return of around 62% from 53%.

(b)     Corporate tax rate for new-Indian manufacturing companies (provided they do not avail of any tax deductions/ exemptions/ holidays) reduced from an effective rate of 35.94% to 17.16%. On a base rate comparison of companies not availing any tax deductions/ holidays/ deductions today, this would result in a post DDT investor return of around 69% from 53%.

(c)      No Minimum Alternate Tax (“MAT”) on Indian companies covered by (a) and (b) above. For all other Indian companies, effective MAT rate reduced from 21.55% to 17.47%.

(d)      No buy back tax on listed companies where public announcement made before July 5, 2019.

(e)      Formalization of earlier announcement of roll back of enhanced surcharge on FPIs and capital gains arising from stock exchange-based transactions.

While these measures are likely to create a greater disparity between tax rates for companies and other taxpayers (like firms and individuals), these measures, besides giving a much-needed impetus to the Make In India initiative of the Government and manufacturing sector, in particular, are likely to jump start growth and investment leading to greater employment generation and spur in consumption.

Date: September 20, 2019