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India’s Tax Cut Masterstroke to Benefit Manufacturing Sector


The Indian economy is desperately in need of various measures to increase growth and revive industries from the prolonged negativity. Of all the economic measures announced so far in the current Government’s second term to revive a slowing economy, corporate tax cut announcement made on 20 September 2019 easily ranks at the top.

The reduction in corporate tax rate from 34.94% to 25.17%, inclusive of surcharge and cess, for companies which does not seek any exemption or incentives is a good step taken by the Indian Government to provide stimulus for the economy. Further, out of various announcements made by the Finance Minister, most important is the corporate tax rate of 15% (effective tax rate of 17.16%, including surcharge of 10% and cess of 4%) for all new domestic manufacturing companies, registered and set up on or after 1 October 2019 and commenced manufacturing on or before 31 March 2023. 

The corporate tax rate of 17.16% will bring joy to the companies engaged in manufacturing sector. The rationalisation of tax rates makes India competitive as an investment destination as compared to corporate tax regimes in other Asian countries - China (25%), Malaysia (24%), Philippines (30%), Thailand (20%) and Vietnam (20%).

With these measures, many Multi-National Corporations (MNCs) can now set up new manufacturing units, by incorporating a new company, in India to save tax and take advantage of India’s lower labour cost and a rich talent pool. 

Any investment by MNCs in India is governed by Foreign Direct Investment (FDI) policy. FDI in India started in the wake of 1991 economic crisis and since then FDI has steadily increased in India. The Department for Promotion of Industry and Internal Trade (DPIIT) is the nodal Department for formulation of the policy of the Government on FDI. According to the Annual Report of DPIIT for Financial Year 2018-2019, India has received the highest-ever FDI inflow of USD 64.37bn during the said financial year. 

As per the FDI policy, as amended from time to time, 100% FDI is permitted in the manufacturing sector under the automatic route. The policy also allows manufacturers to sell products manufactured in India through the wholesale and retail channels, including through e-commerce. Recently, vide Press Note 4 of 2019, the Government has allowed 100% FDI under automatic route in ‘Contract Manufacturing’ in India. This amendment, along with tax cut, is expected to give a boost to domestic manufacturing in India. 

With the help of ‘Make in India’ drive, India is on the path of becoming the hub for manufacturing as global giants such as GE, Siemens, and Boeing have either set up or are in process of setting up manufacturing plants in India. Several mobile phone, luxury and automobile brands, among others, have set up or are looking to establish their manufacturing base in India.

Separately, as per the Doing Business Report, 2019 released by World Bank, India is now placed at 77th rank among 190 countries assessed by the World Bank for ease of doing business. India climbed 23 points in the index to 77th place in 2019, becoming the top ranked country in South Asia for the first time and third among the BRICS.

The reduction in corporate tax rate will enable companies to optimize their cash flows and enable it to make new investments or pay higher dividends to their shareholders. It will also widen the tax net and will gradually bring more revenues to government.

Other than corporate tax, the manufacturing companies will also be liable for Goods and Service Tax (GST) - an indirect tax levied on manufacture, sale and consumption of goods as well as services at the national level. It has replaced all indirect taxes levied on goods and services by the Central and State Governments. The Government has put into place different tax slab under which all products and services are listed. GST rate ranges from 0% to 28%. Post implementation of GST, the manufacturing sector has benefited due to reduced cost of production, ease of movement of goods and services, introduction of e-way bill, supply chain management and capacity utilisation, etc.

With an effective corporate tax rate of 17.16% for new manufacturing companies, India now has the lowest tax rate among its peers which has strengthened its competitiveness. The concessional tax rate is applicable from the current financial year. It is also provided that the new manufacturing companies which are opting for such concessional tax rate will not be subject to Minimum Alternate Tax on book profits.

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Avalara Author
Viren Shah
Avalara Author Viren Shah
Viren Shah, a member of the Institute of Chartered Accountants of India and a Bachelor of Commerce from Mumbai University, has experience of more than a decade in Corporate and International Taxation. He specializes in Domestic and International Taxation, with specific emphasis on cross border transactions and exchange control laws with respect to inbound and outbound investments. He has vast experience in advising companies across various sectors such as payment, media & entertainment, technology, advertising, infrastructure, in various aspects of corporate and international taxation.