NEW DELHI: India cut corporate tax rates on Friday in a surprise move designed to attract manufacturers, revive private investment and lift growth from a six-year low that has led to major job losses and fuelled discontent in the countryside.
Foreign companies that have Indian subsidiaries or joint ventures with Indian companies are also eligible for the lower corporate tax rates, Finance Minister Nirmala Sitharaman said.
Foreign and domestic investors have complained for years that India’s corporate tax rates were too high. The new rate puts India broadly on par with other emerging Asian economies, where corporate tax rates tend to be between 20% and 25%, according to data compiled by Deloitte.
India’s corporate tax will be more competitive than in neighbouring Bangladesh, where the garment industry has been growing, but slightly less attractive than in Vietnam, which has become a major destination for businesses looking to avoid impact from the US-China trade dispute.
Under the changes announced in New Delhi, headline corporate taxes for domestic companies were reduced to 22% from 30%. Factoring in surcharge and cess, the effective tax rate fell to about 25% from around 35%.
Taxes will be further lowered to 15% for companies created on or after Oct 1 and that invest in manufacturing, as long as their production begins on or before March 31, 2023. The effective tax rate will be around 17%.
India has been seeking to boost its tepid manufacturing sector through its “Make in India” campaign. The automotive sector, once a bright star in the sector, has slashed manufacturing this year as demand has faltered.
No changes were announced to the branch rate, which is a tax on foreign companies’ local branches in India. The rate is currently 40%, according to Deloitte. Major foreign companies, however, tend to be incorporated in India, and so would be eligible for the lower corporate tax rate.
The tax cut translates into a revenue loss of $20.5 billion for the current fiscal year. That increases the risk of the government missing its fiscal deficit target of 3.3%, considering tax revenue has already been weak.
In a related development, authorities said listed companies that made public announcements of share buybacks before July 5 would be exempted from tax on the buybacks.