Corporate Tax Rates reduced in India – A Revolutionary Move to Revive the Economy

India’s economy has been little slow in the first quarter of this fiscal year supplemented with a drop in consumer demand and also investment. The GDP’s slowdown affected the investments in various sectors such as automobile, real estate, manufacturing, etc. and these sectors are also going through a slump. The Indian Government is quite aware of this current situation of the economy and has made efforts to give a few economic boosters a couple of weeks back. However, now the government has announced a great benefit for the Indian Corporate sector. On 20 September 2019, the Indian Government has passed a Taxation Laws (Amendment) Ordinance, 2019 which is meant to amend the Finance (No. 2) Act, 2019 to offer effect to the corporate tax cuts, elimination of super-rich surcharge which was levied on capital gains tax, etc. The main takeaways from this announcement and ordinance are as mentioned below:

The takeaways

1.Decrease in Corporate Tax to 22% certain for domestic companies:

• Reduction in corporate tax to almost 22% (effective tax rate comes to 25.17% after surcharge and cess) applicable for all domestic firms from Financial Year (FY) 2019-20.
  This rate will be applicable subject to the following:
  • Company is not availing any exemptions or other incentives, which inter-alia includes:
  • Any SEZ benefits
  • Extra depreciation allowance
  • Deduction for investments made in new plant and/or machinery specifically in notified backward states
  • Deduction given for tea, coffee, rubber development allowance or in site restoration fund
  • Expenditure made on account of scientific research, skill development project, agricultural extension project, etc.
  • Specific Tax Holidays given under Part C of Chapter VI (such as profit link deduction for SEZ development, undertakings in particular states or areas, housing projects, etc.). But, deduction in regards to employment of new employees given u/s 80JJAA would still continue to be given.
• Company would not set off any loss which is carried forward from the previous year in case such loss is attributable to any of the exemptions or incentives that are mentioned above in the current or following year.
• Tax return should be filed by the firm within the prescribed due date.

Please note that the above-mentioned concessional tax rate is at a discretion of the taxpayer, that is, they could either go for the concessional tax rate of 22% or have an option of continuing with the existing tax rate of 25%/30% with continuing the tax incentives/exemptions that are provided above. In case the option of a concessional tax rate of 22% is exercised even once in any year, then it cannot be withdrawn subsequently.
Companies which are not opting for applying the concessional tax rate could carry on paying at the current corporate tax rate and continue claiming the exemptions or incentives. After the tax holiday period or exemption expires, the firms can choose the concessional rate.

• The entity opting for 22%, would not be liable for Minimum Alternate Tax (MAT).
  
  

2.Decrease in Corporate Tax to 15 % for some particular manufacturing firms:

• The concessional corporate tax rate applicable for a new manufacturing company is now reduced to 15% (at an effective tax rate of 17.01%), and is subject to the below-mentioned conditions:
• Company should be incorporated after 1 October 2019 and should have started production on or before 31 March 2023.

• The company should be involved in manufacturing or production, or research with regards to such article produced.
• All the terms and conditions mentioned for taking this 22% rate (specified in point 1) would be applicable.
• Such firms should not have been formed by splitting any already existing businesses or by using previously used plant or machinery or utilise any building that was earlier used as a hotel or convention centre.

• Additionally, provisions of Domestic Transfer Pricing would be applicable for the transaction which happens between a new manufacturing firm and all the related parties.
• Please note that the above-mentioned concessional tax rate is at a discretion of the taxpayer and after the option is exercised in any year, it cannot be withdrawn subsequently.
• The company which is going for 15% tax rate, would not be eligible for Minimum Alternate Tax (MAT).
  
  

3.Decrease in MAT rates:

• MAT has been cut from 18.5 % to 15%, in case of the firms that do not choose to pay tax under these concessional tax rates.
  
  

4.Rollback of increased surcharge:

• The increased surcharge which was announced in the Finance Act 2019 in regards to individuals, Association of Person (FPIs would get covered here), HUF, etc. on income going above some stated limit has been relaxed in terms of capital gains resulting from sale of equity share in a firm or a unit of a business trust which is eligible for securities transaction tax (STT), or a unit of an equity-oriented fund.
• Increased surcharge which was introduced in the Finance Act 2019 would also not be applicable to Foreign Portfolio Investors (FPI’s) while a sale of any security including derivatives is done.
  
  

5.Respite from Buy-back tax:

• Listed companies which have announced buy-back of shares earlier than July 5, 2019, would not be charged with any buyback tax.

The FM has also talked about increasing the scope of Corporate Social Responsibility (CSR) spending of the usual 2% to other beneficial areas. The CSR can now be consumed on incubators which are funded by central or state governments, or any agencies or PSU of central or state government, and also publicly-funded universities, National Laboratories, IIT’s, and any Autonomous bodies who are involved in research in fields of science, engineering, technology and medicine.