MUMBAI (Reuters) - India cut corporate tax rates on Friday in a surprise move designed to woo manufacturers, revive private investment and lift growth from a six-year low that has led to major job losses and fueled discontent in the countryside.
Foreign firms that have Indian subsidiaries or joint ventures with Indian companies can also get 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 fellow emerging Asian nations, whose corporate tax rates tend to be between 20%-25%, according to data compiled by Deloitte.
India’s corporate tax will be more competitive than in neighboring Bangladesh, where the garments industry has been growing, but slightly less attractive than in Vietnam, which has wooed businesses affected by the U.S.-China trade dispute.
Here are some facts about the tax announcements:
- 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 auto sector, once a bright star in the sector, has slashed manufacturing this year as demand has faltered.
- No changes were announced to India’s branch rate, which is a tax on foreign companies’ local branches. 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 New Delhi’s risk of missing its fiscal deficit target of 3.3%, considering tax revenue has already been weak.
- Listed companies that made public announcements of share buy-backs before July 5 will be exempted of tax on the buy-back.
(Data compiled by Deloitte)
Reporting by Alexandra Ulmer; editing by Sanjeev Miglani