India cuts corporate tax rates to end the economic spiral and unleash the market's animal spirits

Finance Minister Nirmala Sitharaman addresses a press conference after a review meeting in New Delhi.Photo/Kamal Kishore) (
  • Firms have an option to pay income tax at 22% if they give up exemptions or incentives.
  • The effective tax rate will come down sharply to 25.7% boosting profitability of companies.
  • Any new domestic company incorporated on or after Oct 1, 2019, making fresh investment in manufacturing, has an option to pay income tax at 15%.
  • Foreign investors have been exempted from the additional surcharge imposed in the latest budget.
  • Minimum Alternate Tax reduced from existing 18.5% to 15%.
  • No tax on share buybacks announced before July 5, 2019.
  • Money spent on state-run startup incubators or any central or state government agency will count as CSR.
  • The government has given up ₹1.45 trillion in revenue to provide today's stimulus.

Diwali has come early for financial investors and corporates in India as the government acts decisively to battle the economic slowdown.

Indian Finance Minister Nirmala Sitharaman has unleashed the market's animal spirits with a massive stimulus to end the country's economic downturn. The government has given up ₹1.45 trillion in revenue that will leave more money in the hands of businesses to invest and revive the economy.

Stock markets in India are on cloud nine hoping for more profits due to lower taxes. Sensex has jumped over 5%, the sharpest single day in many years. The Bank Nifty went up over 200o points at one point.

These are the top announcements made by Sitharaman in a press conference that has sparked a historic rally in Indian stock markets.

  1. Firms have an option to pay income tax at 22% if they give up exemptions or incentives.
  2. The effective tax rate will come down sharply to 25.7% boosting profitability of companies.
  3. Any new domestic company incorporated on or after Oct 1, 2019, making fresh investment in manufacturing, has an option to pay income tax at 15%.
  4. Foreign investors have been exempted from the additional surcharge imposed in the latest budget.
  5. Minimum Alternate Tax reduced from existing 18.5% to 15% before surcharge.
  6. No tax on share buybacks announced before July 5, 2019.
  7. Money spent on state-run startup incubators or any central or state government agency will count as CSR.

"This is the budget that counts," veteran investor Vallabh Bhanshali told a television channel to highlight that the move by the Indian government has sent out the right signal to the markets and global investors. "My net investments are the highest ever, more than 100%," said the Singapore-based Samir Arora of Helios Capital, and added that the market rally following this decision "will not be just 5-7%. It will be much bigger than that."

Indian economy, which was the world's fastest-growing economy until recently, had slipped to a quarterly growth rate of 5%, the slowest in last six years. A broad-based slowdown across sectors from automobiles to textiles to fast-moving consumer goods indicated a worsening health of the economy.

There are those who believe that this is yet another move that is targeting the wrong end of the economy. "This is yet another supply-side measure whereas the real slowdown is on the demand side," renowned economist Pronab Sen told a TV channel adding that the impact of the announcements may be limited in boosting consumption.

SEE ALSO:
India unveils economic stimulus-- from homes to cars to banks to infrastructure to equity markets

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