Explained: How to read corporate tax cut

News:Recently, the Government has reduced the corporate tax rates in order to encourage manufacturing and boost private investment.

Facts:

What has the government done?

  • The central government has slashed corporate tax rates for domestic firms from 30% to 22% and for new manufacturing companies from 25% to 15% to boost economic growth.
  • The new effective tax rate inclusive of surcharge and cess for domestic companies would be 25.17% and for new domestic manufacturing companies would be 17.01%.
  • Also,the Minimum Alternate Tax(MAT) will not apply to such companies.

Significance of the rate cut:The tax rate cut does the following

  • The rate cut leaves corporates with more money which they can use to either reinvest in existing firms or invest in new ventures.
  • In the medium to long term that is anywhere between one or two and five years or more, a corporate tax cut is expected to boost investments and increase the productive capacity of the economy.
  • The additional money may lead to a secondary round effect where these companies may hire more employees.
  • The rate cut is also expected to give a great stimulus to ‘Make In India’, by attracting private investment from across the globe and improving  the competitiveness of the private sector.

Concerns of the rate cut:

  • The rate cut will cost the government Rs 1.45 lakh crore annually.This increases the chances of higher fiscal deficit.
  • The corporate tax cut also depresses economic activity to the extent that it reduces the money in the hands of the government in the form of tax revenues.
  • The states will also be impacted as 42% of Union taxes is devolved to the states.Hence,they will receive almost Rs 61,000 crore less from the Central government.
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