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Finance Minister slashes corporate tax to boost economy - A brief overview

Published: Oct 09, 2019

By Ashish Mittal, CA

THIS article discusses the measures undertaken by the Government vide the Taxation Laws (Amendment) Ordinance 2019, announcing key changes to corporate tax rates in the Income-tax Act, 1961 (Act). A brief summary of the same is provided below:

S No
Applicability
Amendment
1
Reduced corporate tax rate for domestic companies who do not claim any exemptions/incentives- Section 115BAA*
-  Corporate tax reduced to 22% effective from FY 2019-20
-  Effective tax rate inclusive of surcharge and cess - 25.17%
-  No requirement to pay Minimum Alternative Tax
-  Brought forward MAT credit to get lapsed
2
Reduced corporate tax rate for new domestic company which is: (i) incorporated on or after 1st October 2019 (ii) commence production on or before 31 March 2023 and (iii) do not claim any exemption/ incentives - Section 115BAB**
-  Corporate tax reduced to 15% from FY 2019-20
-  Effective tax rate inclusive of surcharge and cess - 17.01%
-  No requirement to pay Minimum Alternative Tax
3
Companies which do not opt for Section 115BAA and which continue to claim exemptions/ incentives
-  Existing tax rates would apply
-  MAT rate reduced from 18.5% to 15%
-  Can opt for reduced tax rate of 22% after expiry of tax holiday/ exemption period, if they are claiming any presently - once opted for reduced rate then the company cannot take a 'U' turn for old rate
4
Individual, HUF, AOP, BOI and Artificial Juridical Person
Enhanced surcharge not applicable for 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 .
5
Foreign Portfolio Investors
Enhanced surcharge not applicable on sale of any security including derivatives
6
Listed companies who have already made announcement for buyback before 5 July 2019
No buy-back tax u/s 115QA on distribution.
7
For companies spending CSR 2%- avenues expanded for spending
CSR can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government, and, making contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices  of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.

*Concessional tax @22% can be claimed subject to following conditions:

1) Following deductions/ incentives shall not be claimed:

a) Deduction relating to units established in Special Economic Zones u/s 10AA

b) Additional depreciation on new plant or machinery u/s 32(1)(iia)

c) Investment in new plant and machinery in notified backward areas -Section 32AD

d) Tea, coffee, rubber development account - -Section 33AB

e) Site restoration fund - Section 33ABA

f) Expenditure on scientific research under Section (2AA)(1)(ii), (iia) and (iii) or Section 35(2AB)

g) Expenditure for specified business-Section 35AD

h) Agricultural extension project-Section 35CCC

i) Skill development project-Section 35CCD and

j) Chapter VI - Part C- 'Deductions in respect of certain incomes' other than the provisions of Section 80JJAA

2) No set off of any loss carried forward from any earlier assessment year will be allowed if such loss is attributable to any of the above deductions.

3) Normal Depreciation u/2 32 other than additional depreciation as discussed above, shall be allowed

These provisions shall not apply unless the option is exercised in the prescribed manner on or before the due date for furnishing the returns of income and such option once exercised shall apply to subsequent assessment years. Also, once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

** Concessional tax @15 % can be claimed subject to following conditions:

1) It is not formed by splitting up, or the reconstruction, of a business already in existence (subject to certain conditions)

2) It does not use any machinery or plant previously used for any purpose (subject to certain conditions).

3) It does not use any building previously used as a hotel or a convention centre.

4) The company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it.

5) The total income of the company has been computed:

a) Without any deduction under the specified provisions (Similar to Section 115BAA as discussed above)

b) Without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the above deductions.

c) By claiming Normal Depreciation u/2 32 other than additional depreciation as discussed above.

These provisions shall not apply unless the option is exercised by the person in the prescribed manner on or before the due date for furnishing the returns of income and such option once exercised shall apply to subsequent assessment years also. Also, it cannot be subsequently withdrawn for the same or any other previous year.

Conclusion:

The reduction in corporate tax rates for domestic companies is a bold step taken by the Government to tackle the slow-down in the economy. All domestic companies across sectors will stand to benefit from the reduction if they opt to sacrifice the tax deductions/ incentives

However, on account of no set off of brought forward MAT credit will be a temporary hindrance for companies having such MAT credit to be set off and may opt for the new rate post setting off the MAT credit. In this regard, companies will need to have a detailed analysis on whether to continue with old rate and set off the MAT credit or adopt the new rate. This analysis is critical as there is option to shift to new rate anytime but once opted for new rate then there is no scope for going back to old rate.

The special concessional effective tax rate of 17.16% for new domestic manufacturing companies will give a boost to 'Make in India' policy of the Government.

[The views expressed are strictly personal.]

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