TAXATION LAWS AMENDMENT, 2019


The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved the proposal for introducing the Taxation Laws (Amendment) Bill, 2019 in order to replace the Ordinance.

Economic developments after the enactment of the Finance (No. 2) Act, 2019 (Finance Act) along with reduction of rate of corporate income tax by many countries world over necessitated the provision of additional fiscal stimulus to attract investment, generate employment and boost the economy. As these could have been achieved through amendment to the Income-tax Act, 1961 (IT Act) or to the Finance Act and the Parliament was not in session, it was done through promulgation of The Taxation Laws (Amendment) Ordinance 2019 (the Ordinance) in September, 2019. Salient features of the amendments made by the Ordinance are provided in the following paras.

Currently, domestic companies with annual turnover of up to Rs 400 crore pay income tax at the rate of 25%. For other domestic companies, the tax rate is 30%. The Ordinance provides domestic companies with an option to pay tax at the rate of 22%, provided they do not claim certain deductions under the Income Tax Act.

These include deductions for: (i) newly established units in Special Economic Zones, (ii) expenditure on scientific research and skill development projects, (iii) investment in new machinery/ plant in notified backward areas, (iv) depreciation of new machinery/ plant, and (v) various other Chapter VI-A provisions.

In order to promote growth and investment, a new provision was inserted in the IT Act to provide that with effect from the current financial year 2019-20, an existing domestic company may opt to pay tax at 22% plus surcharge at 10% and cess at 4%, if it does not claim any incentive/deduction. The effective tax rate for these companies comes to 25.17% for these companies. They would also not be subjected to Minimum Alternate Tax (MAT).

In order to attract fresh investment in manufacturing and provide boost to 'Make-in India' initiative of the Government, another provision was inserted to the IT Act, to provide that a domestic manufacturing company set up on or after 1st October, 2019 and which commences manufacturing by 31st March, 2023, may opt to pay tax at 15% plus surcharge at 10% and cess at 4% if it does not claim any incentive/deduction. The effective rate of tax comes to 17.16% for these companies. They would also not be subjected to MAT.

A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period. After the exercise of the option they shall be liable to pay tax at the rate of 22%. Further, in order to provide relief to companies which continue to avail exemptions/incentive, the rate of MAT was reduced from existing 18.5% to 15%.

In order to provide relief to listed companies, the buy-back tax on shares of listed companies introduced through the Finance Act will not apply to buy-backs in respect of which public announcement were made before 5th July, 2019.

In order to stabilise the flow of funds into the capital market, it was provided that the enhanced surcharge introduced through the Finance Act on capital gains arising on account of transfer of listed equity share or certain units which are liable to securities transaction tax will not apply. Further, it was also provided that the enhanced surcharge will not apply to capital gains income of FPIs arising out of transfer of any security including derivatives, having concessional tax regime.





Key Issues and Analysis

In 2017-18, 29% of the 8.4 lakh companies paid tax at an effective rate higher than 25%. The Ordinance allows these companies a lower statutory tax rate option of 25.17%. Note that these companies contributed 69% of the total income tax paid by all companies in 2017-18.

In case of the manufacturing sector, the effective tax rate after deductions was 28% in 2017-18. This is much higher than the 17.16% statutory tax rate option provided under the Ordinance for new domestic manufacturing companies.

The Ministry of Finance has estimated the revenue impact of new tax rates and other measures under the Ordinance (includes exemptions to capital gains of certain investors from increased surcharge rates) at Rs 1.45 lakh crore. This could increase the fiscal deficit for the year 2019-20 from 3.3% of GDP to 4% of GDP.

The Ordinance specifies that the MAT provisions (Section 115JB of the IT Act) will not apply to companies opting for the new rates. It does not amend Section 115JAA, which allows companies to utilise MAT credit available with them to pay tax. After the Ordinance, the Central Board of Direct Taxes issued a circular specifying that MAT credit cannot be utilised by companies opting for the new rates. The question is whether a circular can override the MAT credit facility provided in the IT Act.

Key Features:

New income tax rate option for domestic companies

- Currently, for domestic companies with annual turnover of up to Rs 400 crore, the income tax rate is 25%. For other domestic companies, the tax rate is 30%. The Ordinance provides domestic companies with an option to pay income tax at the rate of 22%, provided they do not claim certain deductions under the IT Act. These include deductions provided for: (i) newly established units in Special Economic Zones (SEZs), (ii) investment in new plant or machinery in notified backward areas, (iii) expenditure on scientific research, agriculture extension, and skill development projects, (iv) depreciation of new plant or machinery (in certain cases), and (v) various other provisions in the IT Act under Chapter VI-A.

The Ordinance provides new domestic manufacturing companies with an option to pay income tax at the rate of 15%, provided they do not claim certain deductions (as specified above). These new companies must be set up and registered after September 30, 2019, and start manufacturing before April 1, 2023. New manufacturing companies will not include companies: (i) formed by splitting up or reconstruction of an existing business, (ii) engaged in any business other than manufacturing or production, and (iii) using any plant or machinery previously used in India (except under certain specified conditions).

Provisions for companies opting for the new tax rates

A company can choose to opt for the new tax rates in the financial year 2019-20 (i.e. assessment year 2020-21) or in any other financial year in the future. Once a company exercises this option, the chosen provision will apply for all subsequent years.

Domestic companies pay surcharge at 7%, if income is between one crore rupees and Rs 10 crore, and at 12%, if income is more than Rs 10 crore. Companies opting for the new rates have to pay a 10% surcharge.

Minimum Alternate Tax

Minimum Alternate Tax (MAT) is the minimum amount of tax required to be paid by a company, in case its tax liability after claiming deductions falls below a certain limit. This limit is calculated as a certain percentage (i.e. MAT rate) of the company’s book profit (subject to certain adjustments). The Ordinance reduces the MAT rate from 18.5% to 15% with effect from the financial year 2019-20.

The Ordinance specifies that the provisions regarding payment of MAT under the IT Act will not apply to companies opting for the new tax rates.

Impact of lower tax rate

The Ordinance provides that domestic companies can opt for the 22% tax rate and new domestic manufacturing companies can opt for the 15% tax rate, provided they do not claim certain deductions. Including surcharge and cess, companies opting for these tax rates are statutorily required to pay tax at the rates of 25.17% and 17.16%, respectively. Before the Ordinance, the statutory tax rates for domestic companies ranged from 26% to 35% (Table 1); however, they could reduce their effective tax rates by claiming deductions under the IT Act. In the following section, we examine the effective rates at which companies pay taxes (after claiming deductions) to understand how many companies could opt for the new tax rates and the likely fiscal impact of lower tax rates.

Table provides data on the effective tax rates for 8.4 lakh companies that filed income tax returns for the financial year 2017-18. These rates are the actual tax rates at which these companies paid tax in 2017-18. About 29% of the 8.4 lakh companies paid tax at an effective rate that was higher than 25%. The Ordinance allows these companies a lower statutory tax rate option of 25.17%. Note that these companies contributed 69% of the total income tax paid by all companies in 2017-18.

For instance, in case of the manufacturing sector, the effective tax rate after deductions was 28% in 2017-18. This is much higher than the 17.16% statutory tax rate option under the Ordinance for new domestic manufacturing companies.
Table: Effective tax rates after deductions (2017-18)
Effective tax rate after deductions
Proportion of companies
Share in total tax paid
Less than zero and zero
45%
1%
0% to 20%
10%
8%
20% to 25%
5%
22%
25% to 30%
19%
16%
30% to 33%
6%
42%
More than 33%
4%
11%
Zero profit before taxes
11%
0%
Note: Effective tax rate is calculated as tax paid after deductions divided by profit before tax. Data is for both domestic and foreign companies.

The fiscal impact of companies opting for the lower tax rate options would depend on: (i) the number of companies opting for these options, and (ii) the difference between their new and old effective tax rates. The Ministry of Finance has estimated the revenue loss in providing the lower tax rates and other measures under the Ordinance (includes exemptions to capital gains of certain investors from increased surcharge rates) at Rs 1.45 lakh crore. This is equivalent to 5.2% of the government’s revenue estimate in 2019-20. If all other parameters remain the same, this could increase the fiscal deficit for the year 2019-20 from 3.3% of GDP to 4% of GDP.



Deductions under the Income Tax Act

The Ordinance specifies certain deductions under the IT Act which cannot be claimed by companies opting for the new tax rates. Table 3 shows the major deductions claimed under the IT Act in terms of their revenue impact (i.e. revenue foregone by the government in allowing the deduction).

The total revenue impact of these deductions was Rs 1.2 lakh crore in 2017-18. Table 3 also classifies deductions depending on whether they can be claimed with the new tax rates. Note that the Ordinance notifies only certain components under accelerated depreciation, export profits of SEZ units, and expenditure on scientific research which cannot be claimed by companies opting for the new tax rates. The revenue impact data for these specific components is not available.

Companies presently availing deductions, which cannot be claimed with the new rates, may decide to continue with the existing system for some time. They may do so till the benefits from deductions are more than those from lower rates. Note that companies can opt for the new rates in 2019-20 or in any other year in the future.

Major deductions for companies under the IT Act and their revenue impact in 2017-18

Deductions that cannot be claimed
Revenue impact
Deductions that can be claimed
Revenue impact
Accelerated depreciation
Rs 58,326 crore*
Donations to charitable trusts and institutions
Rs 1,860 crore
Export profits of SEZ units
Rs 20,918 crore*
Employment of new employees
Rs 738 crore
Profits of power sector undertakings
Rs 13,157 crore
Contributions to political parties
Rs 133 crore
Expenditure on scientific research
Rs 6,832 crore*


Profits of undertakings set-up in Sikkim
Rs 2,321 crore


Profits of undertakings set-up in Uttarakhand
Rs 1,798 crore


Various other deductions
Rs 13,986 crore



Utilisation of MAT credit by companies opting for the new tax rates

Minimum Alternate Tax (MAT) is the minimum amount of tax required to be paid by a company, in case its tax liability falls below a certain rate after claiming deductions under the IT Act. A company paying MAT in excess of its normal tax liability (as per the other provisions of the Act) is provided MAT credit, equivalent to the amount of additional tax it had to pay. The company can use this credit to pay tax in the future (within a 15-year period). For example, a company with Rs 100 crore book profit is required to pay a minimum tax of Rs 15 crore (assuming 15% MAT rate). If its normal tax liability after claiming deductions is Rs 10 crore (less than MAT), it is required to pay MAT of Rs 15 crore, and can use MAT credit of Rs 5 crore to pay tax in the future.

The Ordinance specifies that the MAT provisions (Section 115JB of the IT Act) will not apply to companies opting for the new tax rates. This implies that such companies are not required to pay the minimum amount of tax set by MAT. However, it does not amend Section 115JAA of the IT Act, which allows companies to utilise MAT credit available with them to pay tax.

After the Ordinance, the Central Board of Direct Taxes issued a circular specifying that MAT credit cannot be utilised by companies opting to pay tax at the new rates, as MAT is not applicable to such companies.[10] It also states that since there is no timeline within which a company can opt for the new rates, a company may choose to do so after utilising its MAT credit, if it so desires. The question is whether a circular can override the MAT credit facility provided in the IT Act.

Comparison of corporate tax rates across major countries (2018)

Asia
Tax rate (in %)
Europe
Tax rate (in %)
Other countries
Tax rate (in %)
Hong Kong
16.5
United Kingdom
19
USA
25.8*
Singapore
17
Russia
20
Canada
26.8*
Thailand
20
Switzerland
21.1*
South Africa
28
Vietnam
20
Spain
25
New Zealand
28
Malaysia
24
Netherlands
25
Australia
30
Indonesia
25
Italy
27.8*
Mexico
30
China
25
Germany
29.8*
Argentina
30
South Korea
27.5*
France
34.4
Brazil
34
Japan
29.7*




India#
35






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