Income Tax Act amended for corporate reforms; Will this be enough?

The Taxation Laws (Amendment) Ordinance, 2019 (“Ordinance”) was promulgated by the Ministry of Law and Finance on Friday, September 20, 2019. The amendment is said to be government’s move to uplift the slowing economy of the country. Few major changes brought in by the amendment are:

·  Reduced tax rate for the domestic companies not availing any tax exemptions

A new provision, Section 115BAA has been added in the Income Tax Act, 1961 (“IT Act”) which specifies that income tax payable in respect of the total income of the domestic company shall be computed at the rate of 22% if the total income of the company has been computed:

i.  without any deductions allowed under provisions of IT Act;

ii.  without setting off of any loss carried forward from any previous assessment year;

iii.  by claiming depreciation, if any, under Section 32, other than clause (iia) of sub-section 1 of the same section.

It is also stated that this section will be applicable only when the company exercises the option to avail benefit under this section on or before the due date specified under Section 139(1) for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after April 1, 2020. If this option is availed once then it cannot be withdrawn for same or any other previous year.

·  Reduced tax rate for new domestic manufacturing companies

A new provision, Section 115BAB has been added in the IT Act, which will be in effect from assessment year 2020-2021. This provision states that a manufacturing domestic companies shall have an option to opt for income tax payable at 15%, if they fulfil following requirements:

i.  The company has been set up on or after October 1, 2019 and has commenced manufacturing on or before March 31, 2023. It shall not have been set up by splitting up or reconstruction of a business already in existence.

ii.  Does not use any machinery or plant, previously used for any purpose. However, it does not include any machinery or plant used outside India, and has been imported from a foreign country and there is not depreciation claimed on the same.

iii.  It does not use any building which has been used previously as hotel or convention centre.

iv.  The company is not engaged in any business other than manufacturing.

v.  Other than these conditions, the abovementioned conditions for Section 115BAA shall also be applicable here.

·  New Rate of Surcharge for domestic companies

Previously, the surcharge charged on the domestic companies was based on their income. If the total income of a company was in excess of INR 1 Crore but less than INR 10 Crores then applicable surcharge was of 7% and if income exceeded INR 10 Crores, then the surcharge was charged at 12%. However, going forward if the companies claim the option of Section 115BAA or 115BAB, then a fixed surcharge of 10% will be applicable on them irrespective of their income.

·  Amendment in Section 115QA related to buy-back tax

The Ordinance amends Section 115QA and states that there shall be no buy-back tax on listed companies, if they have made the announcement of buy-back before July 5, 2019 in accordance with provisions of SEBI Buy Back Regulations, 2018.

·  Amendment in Minimum Alternative Tax (“MAT”) provisions

MAT basically means a minimum tax which the companies have to pay as an advance tax. Companies, by using methods like depreciation, deductions as provided under the IT Act try to minimise the taxes to be paid to the government. That is why the government imposes MAT, so that there is a minimum tax that the companies have to pay.

In order to encourage the companies to avail benefit under Sections 115BAA and 115BAB, the Ordinance also provides that there shall be no MAT levied on the companies claiming the option of Section 115BAA and Section 115BAB. Furthermore, the rate of MAT has been reduced to 15% from 18.5%, effective from assessment year 2020-2021 for all other entities.

Quick View

It was an unprecedented move by the central government to bring the tax reforms for tackling the slump in economy. The slashing of corporate tax from 30% to 22% among other changes brought in by the Ordinance is seen as a bold move by the government. It is predicted that through the revised rate of taxation, the government has offered a whooping INR 1.45 Lakh Crores worth of fiscal boost to the economy. This is going to have multi-faceted effect on Indian economy. The lower tax rates are amongst the most competitive tax rates in south Asia. Along with human resources and the competitive tax rates, global companies will have a tough time deciding against moving to India. This change is expected to not only going to enhance investment in the economy but also help in the creation of numerous jobs.

However, the move also comes with its side effects. The estimated relief worth of INR 1.45 Lakh crores might result in India breaching its fiscal deficit target, which will again impact the economy of the country. The problem in demand side has been one of the major reasons for slow economy in India. This move again targets the supply side of the economy with very few implications on the demand side.

The long term effect of these changes will not be visible so early, until then, the Sensex is soaring and Rupee is getting stronger.

Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.