Finance Minister Nirmala Sitharaman September 19 announced a cut in corporate tax rates. While this move is expected to boost profitability for companies, the real benefit will come in for new manufacturing firms set up after October 1, 2019, as they will be required to pay only 15 percent tax.
For white goods firms, this will mean a dual relief. There is an incentive to manufacture products locally which means there is lesser reliance on imports. This, in turn, will bring down the price of the finished goods. It is likely that new joint ventures (JV) will be set up for this purpose.
The finance ministry has said that with effect from FY20 any new domestic company incorporated on or after October 1 making fresh investment in manufacturing, has an option to pay income-tax at the rate of 15 percent.
This benefit is available to companies that do not avail any exemption/incentive and commence production on or before March 31, 2023. The effective tax rate for these companies will be 17.01 percent inclusive of surcharge and cess. Also, such companies will not be required to pay Minimum Alternate Tax (MAT).
Currently, a majority of entry-level to mid-level white goods are manufactured in India. However, premium products are still manufactured in markets like South Korea (that has a tax rate of 25 percent). With the tax incentives, India will be a more attractive option for companies.
Manish Sharma, President and CEO, Panasonic India and South Asia said that this decision will not only further India's ease of doing business, but also provide impetus to the manufacturing sector in the country.
Once a large number of products are manufactured locally, industry players said consumer durables majors from South-East Asia will also find merit in making in India, for India.
Kishan Jain, Director, Goldmedal Electricals said the government’s move to slash rates will promote local manufacturing.
“These measures will aid the domestic production of energy-efficient solutions such as LED lighting and immensely benefit companies operating in this space,” he added.
While India has always been a target market from a sales perspective, it wasn’t a preferred market from a manufacturing standpoint. With the 15 percent tax incentive, this could change.
Kamal Nandi, Business Head & EVP, Godrej Appliances and President, CEAMA (Consumer Electronics and Appliances Manufacturers Association) said that a jump in foreign direct investment (FDI) inflow is expected as the finance minister made it clear that foreign companies in a joint venture with Indian companies, having an office in India will also get tax benefits.
Indian manufacturers had in the past expressed concerns about foreign companies being given a free hand in the Indian market. Ravi Saxena, MD, Wonderchef said the finance ministry’s move will help provide level playing fields to local manufacturers.
Boost to innovation
Research and development (R&D) related activities may also see an increase in spends. Sunil D’Souza, Managing Director, Whirlpool of India said permitting companies to use their 2 percent corporate social responsibility (CSR) spend on incubation will jump shift R&D and Innovation in the country.
The overall benefits, from a cash perspective, will get a boost. Avneet Singh Marwah CEO Super Plastronics (brand licensee of Thomson TVs and Kodak TVs in India) said raw material manufacturers will also end up earning better margins than before.