Union Finance Minister Nirmala Sitharaman on Monday told Parliament that the decision to cut corporate tax rate for domestic companies was necessary post the July Budget to deal with the challenges in the economy.
In her reply to the discussion in the Lok Sabha on the Taxation Laws (Amendment) Bill 2019, which seeks to change the income tax law for lower corporate tax rate options for domestic firms, she said that the cut helps all small and big businesses registered under the Companies Act.
Various opposition members among the 25 members who participated in the debate, however, cornered the government over GDP growth rate which dipped down to 4.5 per cent in the second quarter of 2019-20 - lowest in past six years and advised the government to take suggestions from former Prime Minister and noted economist Manmohan Singh.
Sitharaman said: "You have presented the Budget in July, but if there are challenges coming out in the economy, is it not my duty, therefore, to respond and not waiting for the next budget to answer that we need the sanctity. No, we wanted to be a proactive government."
Noting it was felt that there was an urgent need to take additional fiscal measures to attract investment, stimulate growth and also to create job opportunities, she said that keeping in mind the ongoing trade war between the US and China and with indications that many multinational companies want to get out of China, it was necessary to quickly take a call in reducing the corporate tax.
The Finance Minister also said it was noticed that many countries, particularly in the neighbourhood and in Southeast Asia, had reduced corporate tax and were able to attract a lot of investment and create job opportunities.
"Thailand and Vietnam had reduced their corporate tax to 20 per cent. Singapore was at 17 and other countries were seriously contemplating bring down the rates."
"In particular, when the corporate tax rates were reduced by the Asian developing countries, an emerging market who actually complete with India to attract investments, provided that we were able to provide some impetus in the form of reducing the corporate tax."
However, as the Parliament was not in session and in view of the urgency, the Taxation Laws (Amendment) Ordinance, 2019 was promulgated on September 20, 2019, she said.
"An option was provided to all existing domestic companies to pay tax at 22 per cent which will have an attentive rate of 25.17 per cent after including the surcharge of 10 per cent as against the existing the highest effective corporate tax of 34.94 per cent.
"We also came up with a reduction of corporate tax rate for new manufacturing companies which will be going to start business as of the date we have given of October 1, 2019," she said.
Currently, domestic companies with an annual turnover of up to Rs 400 crore pay income tax at the rate of 25 per cent. For other domestic companies, the tax rate is 30 per cent. The Bill provides domestic companies with an option to pay tax at the rate of 22 per cent, provided they do not claim certain deductions under the Income Tax Act.
The Bill provides new domestic manufacturing companies with an option to pay income tax at the rate of 15 per cent, provided they do not claim certain deductions. These new domestic manufacturing companies must be set up and registered after September 30, 2019 and start manufacturing before April 1, 2023.
A company can choose to opt for the new tax rates in the financial year 2019-20 (assessment year 2020-21) or in any other financial year in the future. Once a company exercises this option, the chosen provision will apply for all subsequent years.
Provisions regarding payment of Minimum Alternate Tax (MAT) will not apply to companies opting for the new tax rates.
The Ordinance reduces the MAT rate (applicable for companies not opting for the new tax rates) from 18.5 per cent to 15 per cent with effect from financial year 2019-20, while the bill amends this provision by making it effective from 2020-21.
Supporting the Bill, NCP's Supriya Sule said the government needs to be proactive but sought to know that if the direct tax collection has substantially dropped how "we are going to cover this".
Sule advised the government to take note of concerns raised by businessman Rahul Bajaj and leaders Manmohan Singh and P. Chidambaram as suggestions, not as criticism.
Mentioning that he does not have any fundamental objection to the essence of the legislation, Congress leader in the house, Adhir Ranjan Chowdhury flagged how the country is "reeling under severe economic slowdown".
"Sound economy is a sound understanding to be brought into action. It is a calculation. It is a doctrine of proportion. It is a foreseeing excellency. But this government has been lacking vision, mission and long term perspective plan. That is why it had to resolve to such kind of measure reaction. It is simply a panic reaction that has been culminated in invocation of Ordinance on September 20.
"I want to suggest you (Nirmala Sitharaman) to talk to Dr Manmohan Singh without any hesitation and take suggestions from him. If you want to save the country, you will have to go to Manmohan Singh because he had said that the GDP will go down 2 points at the time of demonetisation and it happened. He categorically said that India's financial situation will go down at the time of GST and it happened," he said.
DMK's A. Raja also raised the economic slowdown issue, saying the government's approach is not being supported by own economists, including Manmohan Singh, Raghuram Rajan, Urjit Patel, Arvind Panagariya, Surjit Bhalla, and "still the government wanted to say that their calculation is wrong".
The Bill, which seeks to amend the Income Tax Act, 1961 and the Finance (No.2) Act, 2019, was later passed by voice vote.