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)
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*
|
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Profits of undertakings set-up in Sikkim
|
Rs 2,321 crore
|
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Profits of undertakings set-up in Uttarakhand
|
Rs 1,798 crore
|
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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*
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India#
|
35
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