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Indian corporate tax rates among the lowest in Asia

Dipak Mondal     September 23, 2019

The government's decision to bring down corporate tax rates is being hailed as a big structural reform that the country had been looking for in a long time. Industry as well as tax experts see this as a big step towards attracting foreign investments in the country.

The reason being India's headline corporate tax rate was among the highest in South Asia and ASEAN, making it uncompetitive when it comes to attracting foreign investments.

With base tax rate coming down to 22 per cent (15 per cent in case of new investments in manufacturing), the country now has one of the lowest corporate tax rates in the region. Singapore with 17 per cent tax rate, and Vietnam, Thailand, Cambodia and Taiwan with 20 per cent base tax rates are the only countries offering lower rates than India.

"The move makes India attractive from tax perspective. People who had been complaining that India has high tax rates will now find it in the bottom (of the table of base tax rates) if you look at the 17 per cent tax rate on manufacturing," says Dinesh Kanabar, CEO, Dhruva Advisors.

In a report released on Monday, Kotak Economic Research said that the revised rate will be attractive for companies looking to shift from China or considering a China plus one policy.

"Vietnam, one of the foremost 'substitutes' for China, generally offers tax rates of 10 per cent and 17 per cent (for 15 years and 10 years) if investments are targeted at preferred sectors such as education, healthcare, high technology, infrastructure development and renewable energy. With an effective tax rate of 17 per cent for new manufacturing companies, India has removed the tax disadvantage for companies looking to set up capacity in India," says the report.

For long, Vietnam has been considered a big threat to India as it has successfully been attracting foreign investors through lower tax rates. Lot of manufacturers leaving China because of Sino-US trade disputes are said to be opening shops in Vietnam with lower tax rates being one of the reasons for investors' preference for the country.

Among other countries, China, Bangladesh, Korea and Indonesia have base tax rates of 25 per cent, Malaysia 24 per cent and Japan 23.2 per cent. We are almost on par with the US, where the corporate tax rate is 21 per cent and UK where the rate is 19 per cent.

The government has reduced the corporate tax rate from 30 per cent to 22 per cent with effect from 2019-20. Any domestic company will have the option to pay income tax at the rate of 22 per cent (plus surcharge and cess; effective tax rate at 25.6 per cent) subject to the condition that they will not avail any exemption/incentive. Also, such companies would not be required to pay Minimum Alternate Tax (MAT).

Any new domestic manufacturing company incorporated on or after October 1, 2019 making fresh investment in manufacturing, will have an option to pay income tax at the rate of 15 per cent (plus surcharge and cess; effective tax rate at 17.01 per cent). This benefit is available to companies that do not avail of any exemption/incentive and commence their production on or before March 31, 2023. These companies will also not be required to pay MAT.

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