UKIBC welcomes Indian corporate tax rate reduction

By Kealan Finnegan

India Finance Minister, Nirmala Sitharaman, announced a significant reduction in India’s corporate tax rate from 30% to 22%.

The UK India Business Council very much welcomes this far-sighted move, which has long been a request we and our members have made to the Government of India,  most recently at a meeting with India’s Minister of Commerce, Mr Piyush Goyal, in London in July and in our report, ‘How the UK can Make in India’, setting out measures the Government of India should take to support Make in India.

The introduction of this more globally-competitive tax rate will have a positive impact, not just for the major manufacturers, but all the way through the supply chains as businesses will now be able to reinvest more of their profits in innovation and expansion. Therefore, it is only right that we compliment the Indian government on their decisiveness to enact this policy change.

Furthermore, the Finance Minister announced that new manufacturing companies set up after October 1st this year will benefit from an even lower corporate tax rate – 15%, meaning a 17% effective tax rate after surcharges and cess.

Additionally, the Finance Minister announced that companies paying income tax at 22% without exemption or incentives will not be required to pay Minimum Alternative Tax (MAT).

All new tax rates will be applicable from the current fiscal (2019-20) which commenced on 1st April.

These three announcements supplement the recent clarification from the Finance Minister that Foreign portfolio investors (FPIs) will not be subject to applied capital gains tax.

This tax announcement sends a very strong signal that India is open for business. Our members have repeatedly cited ‘taxation issues’ and ‘price points’ as a barrier to doing business in India.  Consequently, a lower and more transparent tax rate helps UK companies in India to continue to reinvest profits across the Indian market, in addition to new investment from fresh market entrants.

It is important that the Government of India builds on the positivity being generated by this announcement by doubling down on its successful efforts to improve the Ease of Doing Business, such as improving access to credit, aligning state regulations, and simplifying and digitising more government approvals.

In the meantime, it is vital that these tax adjustments are made transparently and effectively. While a lower tax rate is an extremely attractive proposition, it is important that complicated tax payments do not become a drain on companies’ productive resources. Reducing regulatory complexities in India, that exist due to divergent rules across states, is a key barrier to overcome. UKIBC would also like to see this clarification translate into the closing of retrospective tax issues.

India’s new tax rate brings it closer to global and regional competitors vying for investment. The G20 average sits at around 25.5%, while the Asia average is at 21%. Thus, India’s proposed effective corporate tax rate of 25.17% (after cess and surcharges are accounted for) is closely aligned with G20 countries and much closer to the regional average, improving India’s offering for doing business.

In sum, we at the UKIBC are delighted at the Indian Government’s decision to reduce its corporate tax rate. A globally-competitive tax rate will help India to deepen existing investment and attract new sources from the UK, which, of course is the top G20 source of FDI into India. So we will now see even more UK investment creating ever-more  jobs in India, bringing prosperity and social benefits across the country. We therefore look forward to working with our members and the Government of India to ensure a smooth transition.

UKIBC CEO, Richard Heald, spoke about the implications of the tax reduction on CNBC’s Going For Growth. To hear Richard’s comments on CNBC click here.

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