India: Corporate Tax Rate Cut- Fine Print Analysis

Taxation Laws (Amendment) Ordinance promulgated by Hon. President of India

A. Reduced tax rate applicable to certain domestic companies (115BAA)

• Section 115BAA has been inserted to provide that lower tax rate of 22% (plus applicable surcharge and cess) shall be chargeable to domestic companies.
• Domestic companies have been given an option to pay income tax at the rate of 22%, provided, they do not avail any incentive/exemption (Refer Note 1) offered under the Income Tax Act.
• Such companies shall not be required to pay any Minimum Alternate Tax (MAT).
• Total income shall have to be computed without set off of any losses carried forward from earlier years, if such loss is attributable to any of the tax incentives / exemptions (Refer Note 1).
• Such domestic company shall have to exercise the option to avail concessional rate in the prescribed manner before the due date of filing of return under section 139(1) for AY 2020-21.
• Once availed, option to pay tax at concessional rate cannot be withdrawn.

B. Reduced rate for manufacturing companies (Section 115BAB)

• Section 115BAB has been inserted to incentivise new domestic manufacturing companies, incorporated after 1st October, 2019.
• Such companies have been given an option to pay tax at the rate of 15 per cent, if they forego all exemptions/ incentives (Refer Note 1) available to them under the Act and commence commercial production on or before 31st March, 2023.
• The manufacturing company:
• • Should not have been formed by splitting up, reconstruction of business already in existence
  • Should not have in use more than 20% second-hand machinery (except imported plant and machinery)
  • Must not use any building previously used as a hotel or convention Centre
  • Must not be engaged in any business other than business of manufacture or production of any article or thing and research in relation to article or thing manufactured by it.
• Such companies shall not be required to pay any Minimum Alternate Tax (MAT).
• Total income of the company shall have to be computed without set off of any losses carried forward from earlier years, if such loss is attributable to any of the deductions/ exemptions (Refer Note 1).
• Domestic Transfer Pricing provisions have been enabled in case of new domestic manufacturing concerns in accordance with section 92BA of the Act.
• Such domestic manufacturing company shall have to exercise the option to avail concessional rate in the prescribed manner before the due date of filing of return under section 139(1) for AY 2020-21.
• Once availed, option to pay tax at concessional rate cannot be withdrawn.

C. Amended section 115BA

• Enabling amendments have been made to Section 115BA (section governing tax on income of manufacturing companies without concessional rates), stipulating that Section 115BA shall be applicable to companies other than those mentioned in Section 115BAA and 115BAB.
• Where a company exercises option under section 115BAA, option under Section 115BA shall lapse.

D. Amendments in provisions of MAT

• Domestic companies, whether manufacturing units or otherwise, which have not opted for concessional tax rate can continue to avail exemptions and incentives (Refer Note 1) offered under the Income Tax Act. Such companies have been provided a relief in the form of reduction of MAT rate from existing 18.5 per cent to 15 per cent.

E. Buy Back Tax (section 115QA)

• A proviso has been added to Section 115QA, professing that the companies that have made public announcement of buy-back before 5th July, 2019 have been exempted from the payment of buy-back tax.

F. Surcharge on super-rich relaxed

• The Budget of 2019 enhanced the surcharge exorbitantly. In order to provide respite, it has been provided that the enhanced surcharge shall not be apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, HUF, AOP, BOI and AJP.
• The enhanced surcharge shall also not be applicable to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs).

Effective Corporate Tax Rates for FY 2019-20 (AY 2020-21)

Note 1 - List of incentives/exemptions that cannot be claimed where lower rate of tax is claimed

Nangia's Take

The government has taken a bold and appropriate step, which shall not only go on to revive the Indian economy by increasing the investment in India Inc. but shall also leave more disposable income in the hands of the corporates. The positive attempt, that costs the government 1.45 lakh crores, shall also align the Indian tax rates with the rest of the world, thereby boosting investment, employment and economic activity. Keeping individuals, HUF, AOP, BOI etc. out of the ambit of super-rich-surcharge to the extent their income is from capital gains on sale of equity/equity oriented funds, will encourage a stabilised flow of fund into the capital markets, which is an essential ingredient for the growth of any developing economy. It is indeed a laudable and timely step by the Government to arrest the slowdown and give the much-needed push to set the Indian Economy on the track to becoming a 5 trillion economy by 2024!

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