NEW DELHI: The government is considering offering fiscal incentives to attract fresh investments to harness opportunities emanating from US President Donald Trump’s strong anti-China stance and to boost India’s growth , including a second version of the 15% concessional corporate tax scheme for specific sectors, people aware of the development said.
The government is considering a proposal on the launch of a modified version of the Taxation Laws (Amendment) Ordinance, 2019 that substantially reduced corporate tax with an intent to attract fresh investment, create jobs and stimulate overall economic growth, they added, requesting anonymity. While the scheme is still work in progress, it is likely that it will find mention in the Union budget that will be presented on February 1, one of them said.
“Mainly, two factors favour such tax incentives. One, America’s anti-China stance could see new investments coming to countries like India, Indonesia and Vietnam, depending on their competitive edge. The other factor is domestic, where fresh investments are necessary to maintain India’s growth momentum that saw some slowing in the second quarter of current financial year,” this person added, identifying manufacturing as one sector that desperately needs fiscal incentives. India’s GDP growth slowed to a seven-quarter low of 5.4% in the second quarter of 2024-25.
Although the government called it a transitory blip because of general elections in the beginning of the current financial year , the first advance estimates GDP for FY25, released on January 7, projected the growth rate at 6.4%, a four-year low primarily due to slower manufacturing and mining sectors. The economy expanded by 8.2% in 2023-24
The government could limit the concessional corporate tax by sector as well duration, the people mentioned above said. Unlike the first version, which restricted this incentive to new manufacturing companies. it may also include some service sectors that can create jobs , the first person said. A modified second version of the incentive scheme is needed because the first one ended on March 31, 2024, he added.
The government on September 20, 2019 promulgated an ordinance reducing corporate tax rates applicable to domestic companies provide they forgo exemptions. While the corporate tax rate for existing domestic companies was slashed from 30% to 22% (excluding surcharge and cess), the rate was further reduced to 15% (plus surcharge and cess) for new domestic companies set up on or after October 1, 2019 as long as they commenced production by March 31, 2023. The sunset clause was subsequently extended by one year.
According to the people mentioned above, the reduced tax rate succeeded in attracting investments, creating jobs, boosting growth and actually translated into higher revenue collections. “Lower tax rates saw a growth in revenues. Corporate tax collection which was about ₹5.57 lakh crore in 2019-20, saw a 63.5% jump to over ₹9.11 lakh crore in 2023-24 post the rate reduction,” the second person said.
Deloitte India partner Rohinton Sidhwa said the first concessional rate incentive generated significant interest from global players. “At a time when industries were recalibrating global supply chains, it sent a strong signal that India was committed to attracting manufacturing investments and positioning itself as a competitive destination,” he said.
It makes sense to do it again, he added.
“This is especially crucial now, as US corporate tax rates are expected to fall, which will prompt other countries to adopt lower rates in the long run. The focus should shift towards job creation and generating revenue through personal income taxes rather than taxing corporate that’s generated from new investment.”
According to Lokesh Shah, partner at consultancy firm IndusLaw, the incentive announced in 2019 had a short window, not sufficient to boost new manufacturing activities in large scale. “Covid took away the initial year-and-a-half of this window, for new companies to register and commence manufacturing,” he said.In order to ensure sustained investor confidence, the proposed scheme should be long-term and should not be restricted to new companies, Sidhwa added. “Existing companies setting up new manufacturing facilities should also be eligible.”
