Explained: How the latest corporate tax rate cut impacts the economy

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News:Finance Minister has announced to reduce the corporate tax rates in order to encourage manufacturing and boost private investment.

Facts:

About the tax rate cut:The government has taken the following decisions:

Why the corporate tax rate cut?

  • The corporate tax rate was reduced as the two other factors of the economy namely government expenditure (where the fiscal deficit is under pressure) and exports (which have been stagnant) have little space to boost growth.

Significance of corporate tax cut:

  • The lower corporate tax is aimed at boosting private sector investment in the backdrop of slowdown in consumption and decline in investment by private businesses.
  • The cut in corporate tax will also make it more attractive for existing and new businesses to invest and increase production which in turn will create employment.
  • However,this move will also cost the government Rs 1.45 lakh crore annually.This increases the chances of higher fiscal deficit and government may have to resort to spending cuts or embark on higher disinvestment.

Additional information:

About MAT:

  • MAT stands for Minimum Alternative Tax.It was introduced by the Finance Act,1987 with effect from assessment year 1988-89.Later on,it was withdrawn and then reintroduced in 1996.
  • The objective of introduction of MAT is to bring into the tax net zero tax companies who in spite of having earned substantial book profits(the profit shown in the profit and loss account) do not pay tax due to various tax concessions and incentives provided under the Income-tax Law.