Amidst various economic measures announced by the Hon’ble Finance Minister (‘Hon’ble FM’) from time to time during August and September 2019, several income tax-related amendments were announced by the Hon’ble FM on 20 September 2019. The measures announced pertain to change in Income Tax rates, Minimum Alternate Tax (‘MAT’) and Buy-back tax and are aimed promoting growth and investment.
It is noteworthy that the Taxation Laws (Amendment) Ordinance 2019 (‘Ordinance’) has been passed barely within two months from the notification of Finance (No. 2) Act, 2019. The amendments in the ordinance pertain to the Income-tax Act, 1961 as well as the Finance (No. 2) Act, 2019. The Government has estimated the total revenue foregone for the reduction in corporate tax rate and other relief measures at INR 1,45,000 crores.
The details of amendments made vide the Ordinance are explained below:
1. Option for reduced Corporate Tax @22% for existing domestic companies (Section 115BAA)
A new section 115BAA has been inserted, giving an option of a reduced tax rate to domestic companies at a base tax rate of 22%, without availing any addition exemption/ incentive. Upon considering the applicable surcharge of 10% and health and education cess of 4%, the effective tax rate works out to be 25.17%.
The option for to choose this provision of reduced tax rates for a particular assessment year onwards shall be available at the discretion of the company and the option once exercised cannot be subsequently revoked.
The option is available subject to the following conditions:
1. No deduction shall be available to the Company under the following provisions:
- Section10AA – profits of a unit in Special Economic Zone (‘SEZ’)
- Section 32(1)(iia) – Additional depreciation allowance @ 20%
- Section 32AC and 32AD – Investment Allowance for investment in new plant and machinery in notified backward states
- Section 33AB – Tea/ Coffee/ Rubber development allowance
- Section 33ABA – Site restoration fund
- Section 35(1)(ii), (iia), (iii) & Sec 35(2AA), (2AB) – Expenditure on scientific research
- Section 35AD – Accelerated deduction on capital expenditure for specified business
- Section 35CCC – Expenditure on agricultural extension project
- Section 35CCD – Expenditure on skill development project
- Deduction under Part C of Chapter VIA other than Sec 80JJAA (deduction in respect of employment of new employees)
2. The Company shall not be eligible to set off any loss carried forward from any earlier assessment year if such loss is attributable to any of the above deductions.
3. Depreciation shall be computed in the manner as will be prescribed. Till such time, the rate of depreciation prescribed in Appendix-1 shall continue to be applicable.
4. Provisions of Section 115JB in respect of MAT on book profits shall not be applicable.
5. Existing MAT credit available to the Company under Section 115JAA shall continue to be applicable for utilisation and set-off. (However, there are varied interpretations on this aspect)
6. The company shall be required to exercise the option before the due date of furnishing the return under section 139(1) of the Act.
7. Option once exercised for any year cannot be subsequently withdrawn for the same or any other assessment year.
8. No condition/ limitation on account of turnover, type of business, nature of activity or date of incorporation.
9. The provision shall be applicable only for domestic companies, i.e. all companies formed and registered in India. Branches or Permanent Establishment(s) of foreign companies are not eligible.
2. Applicable Rates of MAT rationalised (Section 115JB)
The Ordinance has sought to rationalise the existing MAT regime. MAT has been abolished for Companies opting for concessional tax regime under the newly introduced Sections 115BAA and 115BAB.
In respect of the existing Companies, the base rate of MAT has been reduced from 18.5% to 15%. The effective tax rate for a Company having income of exceeding INR 10 crores would be 17.47%.
3. Enhanced surcharge not applicable for capital gains on sale of equity share or equity oriented mutual fund
The Ordinance has effectively deleted the enhanced surcharge in case of income exceeding INR 2 crores and income exceeding INR 5 crores in respect of capital gain arising on sale of equity share in a company or a unit of equity oriented fund or unit of a business trust liable for security transaction tax. This provision would be applicable to capital gains arising to an individual, Hindu Undivided Family, Association of Persons (whether or not incorporated) and Body of Individuals.
4. No enhanced surcharge for capital gains arising on sale of any security including derivatives for Foreign Institutional Investors
The Ordinance has deleted the enhanced surcharge applicable in case of any income chargeable to tax under Section 115AD of the Act in respect of Foreign Institutional Investors being an Association of Persons or Body of Individuals (whether or not incorporated). The income chargeable under
Section 115AD includes short term capital gains and long term capital gains arising from sale of security (as defined under Securities Contract (Regulation) Act, 1956) and income received from securities other than dividends subject to Dividend Distribution Tax.
5. No tax on buyback of share of listed companies before 5 July 2019
As per Sec 115QA of the Act, Buyback tax @ 20% was applicable on the amount of income distributed by unlisted companies. Income distributed by listed companies was not covered under the purview of buyback tax. Instead, shareholders were liable to capital gains tax on the same.
The Ordinance has amended the provision of section 115QA which was amended by the Finance (No.2) Act, 2019 exempting tax on buyback of share of listed companies which have made a public announcement of such buyback before 5 July 2019. This would bring relief to those listed companies which had initiated the buyback process, but had to pay further tax on such buyback after the amendment was effective.
6. Transactions with Company taxed under Section 115BAB covered under transfer pricing
The Ordinance has amended the provisions of Section 92BA of the Act so as to apply transfer pricing provisions on all the transactions between companies subject to tax under Section 115BAB and its associated enterprises. Hence, any such transactions would be considered as ‘specified domestic transactions’ and necessary compliances to be undertaken.
The reduction of corporate tax rates would go a long way in attracting various multinational companies to shift their manufacturing bases into India. India will now be able to take advantage of the global trade issues involving the United States of America, China etc. and promote itself as the manufacturing capital of the world. The effective tax rate of 17.16% is competitive when compared to the other competing economies of the South East Asia such as China, Thailand, Indonesia, Vietnam, Singapore, Hong Kong etc. Increase of manufacturing activity would lead to industrial growth, contributing to growth in employment, economic opportunities and would in turn contribute further revenue to the Government kitty, which was otherwise foreign n by way of the reduced tax regime.
As regards exercising the option to choose beneficial tax rate, it is recommended to carry out a careful and a comprehensive analysis of the tax liability under the existing provisions and the option given under this newly inserted section 115BAA before exercising the option.