Analysis of Taxation Laws (Amendment) Ordinance 2019 

1. Background

On 20th September, 2019, the Taxation Laws (Amendment) Ordinance, 2019 was introduced by the Government of India, proposing various amendments in the Income Tax Act of 1961 as well as the Finance (No. 2) Act of 2019. The amendment includes an effective tax rate of 17.16% for manufacturing companies, which is quite competitive with or even better than the competing economies of Southeast Asia such as China, Thailand, Indonesia, Vietnam, Singapore, and Hong Kong. All the amendments are to be effective from 1st April, 2020. They will apply to the assessment year 2020-2021, relating to income earned in the financial year 2019-20 (which begins on 1st April, 2019).

The Indian economy is passing through a turbulent phase with GDP growth dropping down to 5% in the quarter ending June 2019. The Government of India has recognised the need for measures to improve public sentiment and the ease of doing business, as well as to revive the economy and put it back on track. Considering this, over the past month, it has announced multiple measures in this direction (for example, facilitation of start-ups and capital infusion in banks).

This article provides an analysis of important amendments introduced by the Ordinance, including comparative charts and tables. It also explains the factors to be considered while selecting the form of an organization from the options of Company, Proprietor, Partnership Firm and Limited Liability Partnership (LLP).

2. New Corporate Tax Rates

22% New Tax Rate (Sec. 115BAA)

An option is provided to all domestic companies to pay tax at a concessional rate of 22 percent with a fixed surcharge of 10 per cent and health and education cess of 4 percent. Thus, the effective tax rate for domestic companies will be 25.17 per cent.

Note that this provision is applicable to Indian domestic companies—i.e., all companies formed and registered in India, including by Multinational Companies—but does not include branches or permanent establishments of foreign companies.

15% Tax Rate for New Manufacturing Companies (Sec. 115BAB)

This provides the option of a concessional tax rate of 15% with a fixed surcharge of 10 per cent and a health and education cess of 4 percent to new domestic companies. These companies must be engaged solely in the business of manufacturing or production of any article or thing and research in relation to, or distribution of such article or thing manufactured or produced by the company.

This benefit will be available to all such domestic companies which are set up and registered on or after 1st October, 2019 and commence manufacturing on or before the 31st of March, 2023. Hence, this deduction will not be available to an existing company even if it sets up a new unit of manufacturing or production.

 Chart of New Corporate Tax Rates with Conditions:

Specified Deductions and Incentives Not Allowed under Sec. 115BAA and 115BAB:

• SEZ u/s. 10AA

• Additional initial depreciation allowance @ 20% u/s. 32(1)(iia)

• The investment allowance for new Plant & Machinery u/s. 32AC, 32AD

• Tea Development Benefit u/s. 33AB

• Site Restoration Benefit u/s. 33ABA

• Scientific Research Benefit u/s. 35

• Accelerated capital deduction u/s. 35CCC

• Skill development project u/s. 35CCD

• Benefits available u/s. 80A, 80IB, 80IC etc (other than sec. 80JJAA)

Tax Rates Benefit Due to Sec. 115BAA:

Clarifications by CBDT 

The CBDT vide circular dated 2nd October, 2019 clarified two principal issues of allowability of brought forward loss and MAT credit.

(a) Allowability of brought forward loss on account of additional depreciation:

115BAA(2)(1) inter provides that the total income shall be computed without claiming any deduction under section 32 (1)(iia) additional depreciation. Also, it is provided that the total income shall be computed without claiming set-off of any loss carried forward from any earlier assessment year if the same is attributable, inter alia to additional depreciation.

Therefore, a domestic company which would exercise the option for availing the benefit of the lower tax rate under section 115BAA shall not be allowed to claim set-off of any brought forward loss on account of additional depreciation for an Assessment Year for which the option has been exercised and for any subsequent Assessment Year.

Further, as there is no timeline within which the option under section 115 BA can be exercised, it may be noted that a domestic company with brought forward losses on account of additional depreciation may, if it so desires exercise the option after setting off the losses so accumulated.

(b) Allowability of brought forward loss MAT credit:

Provisions of Section 115JB relating to MAT shall not be applicable to a domestic company which exercises the option under section 115BAA. Therefore, it is clarified that the tax credit of MAT paid by a domestic company exercising the option under section 115BAA of the Act shall not be available consequent to exercising of such option.

Further, as there is no timeline within which the option under section 115BAA can be exercised, it may be noted that a domestic company having MAT credit may, if it so desires exercise the option after utilising the said credit against the regular tax payable under the taxation regime existing prior to the promulgation of the Ordinance.

3. Minimum Alternate Tax (MAT) Rate Reduced to 15%:

The tax rate under section 115JB of the Act has been reduced from 18.5% to 15%. The net tax savings for domestic companies that continue to pay taxes as per the First Schedule to the Finance (No. 2) Act, 2019 can be seen in the following table, which is divided into categories based on the company’s amount of book profits:

4. Other Amendments

(a) Enhanced surcharge not to apply on capital gains on sales of equity shares or equity-oriented mutual funds

The enhanced surcharge on individual HUF, AOP, and BOI, including FPI of 25 per cent in case income exceeds Rs.2 Crore and 37 per cent in case income exceeds Rs.5 Crore, shall not be applicable in respect of capital gains arising on sales of equity shares in a company or units of equity-oriented funds or units of a business trust liable for security transaction tax.

This surcharge shall also not apply to the income of a foreign institutional investor (FII) from securities as referred in section 115AD of the Act.

(b) No tax on buyback of shares of listed companies before 5th July, 2019

The provision of section 115QA which was amended by the Finance (No.2) Act, 2019 exempted tax on buyback of shares of listed companies which have made a public announcement of such buyback before 5th July, 2019. It may be relevant to point out that the Finance (No.2) Act, 2019 has extended the levy of tax on buyback of shares of listed companies, taking effect from 5th July, 2019, with the result that many listed companies which have initiated the process of buyback have to pay further tax on such buyback.

5. Comparison of Companies with Proprietorship, Partnership Firm, LLP:

The introduction of the new corporate tax rates of 22% and 15% have increased the motivation to incorporate companies. Businesses should evaluate which form of organization is most advantageous, considering the taxation and other compliance requirements.

This table compares various forms of organization, assuming they are covered at the highest tax slab.

The company is the preferred organization structure from a tax point of view. However, one has to consider the restrictions and compliance requirements before making a final decision. Here are some of the compliance requirements one needs to consider:

• Restrictions on acceptance of loans or deposits

• Restrictions on giving loans or advances

• Maintenance of records and minutes

• Penalty provisions for non-compliance

• Financials and other details being available on the MCA portal

• Need to understand that the company is a separate person in all dealings

• Various other restrictions and compliance requirements on companies

Conclusion

These amendments will encourage new investment opportunities for entrepreneurs, create job opportunities, and thus help to increase consumer demand. The reduction in corporate tax rates is not just a short-term measure to tackle slowing down of the economy, but also a major policy change. It is the dawn of a new era of corporate taxes, making Indian corporate tax rates internationally competitive.

This is a guest post written by Mr. Chintan Patel. He has more than 15 years of experience in accounting, tax and advisory. He has authored books and is a regular speaker at events organised by ICAI, ICSI, CMA and Corporates.