Corporate tax relief: An elixir for the Indian economy

The story so far
On 05 July 2019, the Indian Finance Minister presented the first Budget of the newly formed Government. At the end of the Budget announcement, which aimed at delivering growth, the corporate tax rates remained unchanged. However, the government extended the moderate corporate tax rate of 25%[1] for a domestic company having total turnover/ gross receipts not exceeding INR 4bn.[2] In this regard, the Indian Finance Minister, in her budget speech, stated that such a move would cover 99.3% of domestic companies. This left out only 0.7% of domestic companies outside this rate. Clearly, small and medium-sized businesses were the beneficial recipients of the tax relief, while large companies continued to pay taxes at the higher rate of 30%1.

The Budget and the announcements made thereafter outlined the Government’s vision to propel India to a US$5tn economy by 2024, by introducing several reforms, such as providing stimulus to infrastructure, manufacturing and liberalisation in the Foreign Direct Investment (FDI) norms in various sectors.

Be that as it may, the Indian economy witnessed its slowest pace of growth in over six years with Gross Domestic Product (GDP) growth recorded at 5% in the first quarter of the financial year 2019-20, following a sharp slowdown in consumer demand and subdued investment.

To tackle the continued slowdown in the growth of the Indian economy, the Government has introduced a slew of measures such as setting up of dedicated cell to resolve the problems of start-ups, measures to boost demand for the automobile industry. One amongst such measures is the significant reduction of corporate tax rates.

The Taxation Laws (Amendment) Ordinance, 2019, to amend the Income-tax Act, 1961 (the Act) and the Finance (No.2) Act, 2019, is the latest development on direct tax-related announcements by the Indian Finance Minister in the last few weeks.

Tax rates slashed

1. Domestic companies[3]

• Domestic companies[4] have been provided with an option to pay income-tax in respect of total income at 22%[5] subject to the satisfaction of the following conditions:
• Total income is computed without claiming prescribed deductions[6]
• Total income is computed without set-off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the prescribed deductions
• Total income is computed by claiming depreciation, other than additional depreciation, as provided under the domestic tax laws, determined in such manner as may be prescribed[7]
• The domestic companies availing the benefit of the reduced tax rate of 25% under the existing provisions[8] of the Act subject to the conditions mentioned therein have also been provided with an option[9] to opt for the lower tax rate of 22%1.
• Once the domestic company opts to exercise the tax rate of 22%, such an option cannot be revoked in subsequent years.
• Such companies have been excluded from the applicability of the Minimum Alternate Tax (MAT) provisions. Furthermore, MAT credit shall not be available to domestic companies exercising the option. However, a domestic company may exercise this option after utilising the available MAT credit against the regular tax payable under the taxation regime existing prior to the promulgation of the Ordinance.[10]
• The option for lower tax rate of 22% must be exercised in the prescribed manner8 before the due date for furnishing the return of income from the financial year 2019-20 onwards.
• Uniform surcharge rate of 10%.

2. New domestic manufacturing companies[11]]

• Domestic manufacturing companies have been provided with an option to pay tax at 15%[12] subject to the satisfaction of the following conditions:
• Such company is incorporated on or after 01 October 2019
• Such company commences manufacturing on or before 31 March 2023
• Such company is not formed by splitting up or reconstruction of a business already in existence. However, an exception has been provided in case of an undertaking formed as a result of the re-establishment, reconstruction or revival of business referred to in the relevant provisions[13] of the Act.
• Such company does not use any machinery or plant previously used for any purpose in India and no depreciation has been claimed[14] on the same
• Such company does not use any building previously used as a hotel or convention centre
• Such company is not engaged in any business other than the manufacture or production of an article or thing and research in relation to or distribution of such article or thing manufactured or produced by it
• The total income of such company is computed without claiming the prescribed deductions6
• The total income is computed without set-off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the prescribed deductions
• The total income is computed by claiming depreciation, other than additional depreciation as provided under the domestic tax laws, determined in such manner as may be prescribed[15]
• The option for lower tax rates in the case of new domestic manufacturing companies must be exercised in the prescribed manner18 before the due date for furnishing the first return of income from the financial year 2019-20.
• Once the new domestic manufacturing company opts to exercise the tax rate of 15%, such option cannot be revoked in subsequent years.
• Such companies have been excluded from the applicability of MAT provisions.
• Uniform surcharge rate of 10%.

3. MAT

The tax rate under the MAT provisions has been reduced from 18.5% to 15% for all domestic companies other than those opting for the reduced rates of 22% or 15% (in which case MAT provisions are not applicable).

4. Others

Roll back of enhanced surcharge rates on capital gains[16]
The Ordinance has repealed the enhanced surcharge rates of 25%/ 37% (as the case may be) for non-corporate taxpayers deriving capital gains from the transfer of listed equity shares, units of equity-oriented funds, and business trusts when such transfers are subject to securities transaction tax; and foreign portfolio investors deriving capital gains from the transfer of any securities including derivatives.

Grandfathering of buy-back tax
Tax on buy-back of shares (being shares listed on a recognised stock exchange) not applicable for shares for which the public announcement was made before 05 July 2019.[17]

The Story ahead
With this move, India’s tax rates are now at par with its competing Asian peers. The Government is leaving no stone unturned to stimulate the “Make in India” initiative, attract investments from across the globe by boosting investor confidence, improve competitiveness and positioning India as one of the most competitive economies in the world.

The tax rate cut, especially in view of the current economic conditions, do seem to be a momentous change and point towards Government’s keenness to push structural reforms for higher growth rate. Introduction of even lower tax rate of 15% for new domestic manufacturing companies is likely to benefit foreign players looking to set up manufacturing facilities in India and give a boost to the “Make in India” initiative of the Government. Such tax rate cut coupled with measures to boost consumer demand, supply-side reforms and other structural reforms should contribute to the robust growth of the Indian economy.

Think about
While the option of lower tax rates looks attractive, it may be relevant for the taxpayers to undertake a fact-specific impact analysis of opting for a lower rate and giving up certain incentives and benefits vis-à-vis continuing in the old regime. This becomes important as the option is irreversible once selected.

References: [1] Plus applicable surcharge and health and education cess [2] Such turnover of a domestic company has to be seen for the financial year 2017-18 [3] Section 115BAA of the Act [4] Domestic company means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income [5] Effective tax rate of 25.17% [6] Following are the prescribed deductions: – – Section 10AA of the Act relating to SEZ – Additional depreciation allowance under section 32(1)(iia) of the Act – Section 32AD of the Act – Deduction for investment in new plant and machinery in notified backward States – Section 33AB of the Act – Tea/ coffee/ rubber development allowance – Section 33ABA of the Act – Site restoration fund – Sections 35(1) (ii), (iia), (iii) and 35(2AA), (2AB) of the Act – certain scientific research expenditure – Section 35AD of the Act – Deduction in respect of expenditure on specified business – Section 35CCC of the Act – Expenditure on agricultural extension project – Section 35CCD of the Act – Expenditure on skill development project – Deduction under Part C of Chapter VIA other than section 80JJAA of the Act (deduction in respect of employment of new employees) [7] Not yet prescribed [8] Section 115BA of the Act – The section provides for a reduced tax rate of 25% to certain domestic manufacturing companies subject to the conditions specified therein [9] Corrigendum to the Taxation Laws (Amendment) Ordinance, 2019 dated 26 September 2019 [10] Circular No. 29/ 2019 dated 02 October 2019 issued by the Central Board of Direct Taxes [11] Section 115BAB of the Act [12] Effective tax rate of 17.16% [13] Section 33B of the Act [14] Relaxation to the extent of 20% of the total value of the machinery or plant used by the company allowed [15] Not yet prescribed [16] Introduced through the Finance (No.2) Act, 2019 [17] The Union Budget 2019 was announced on 05 July 2019