The Taxation Laws (Amendment) Ordinance, 2019 was promulgated on September 20, 2019. The Ordinance amends the Income Tax Act, 1961, and the Finance (No. 2) Act, 2019. The Ordinance provides domestic companies with an option to opt for lower tax rates, provided they do not claim certain deductions. It also amends certain provisions regarding levy of surcharge on income from capital gains.
Corporate tax rate reduced to 22 percent for all Domestic Companies
The Ordinance has inserted a new section – section 115BAA in the IT Act. As per this section, from the fiscal year 2019-20, all domestic companies shall have an option to be taxed at the rate of 22 % (plus applicable surcharge and cess), provided such companies do not avail specified exemptions/ incentives. Surcharge at the rate 10 percent shall be levied. Accordingly, the effective tax rate for Companies opting to pay tax under section 115BAA of the IT Act shall be 25.168 %. The ordinance further provides that domestic companies availing such reduced rate will not be required to pay Minimum Alternate Tax (MAT) under section 115JB of the IT Act, currently levied at 18.5% of book profits. The Ordinance further clarifies that companies, who do not wish to avail this concessional rate immediately, can opt for the same after expiry of their exemptions / incentives. However, once a company opts to be governed by section 115BAA of the IT Act, it cannot be subsequently withdrawn.
Income tax rate for new domestic manufacturing companies
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 under the Act. New manufacturing companies include companies which will be set up and registered after September 30, 2019, and will start manufacturing before April 1, 2023. These will not include companies formed by splitting up or reconstruction of an existing business, engaged in any business other than manufacturing, and using any plant or machinery previously used in India (except under certain specified conditions).
Applicability of new tax rates
Companies can choose to opt for the new tax rate (15% or 22%, whichever is applicable) starting the financial year 2019-20 (i.e. assessment year 2020-21). Once a company has exercised this option, the chosen provision will apply for all the subsequent years.
Surcharge on tax payable at new rates
Currently, domestic companies with income between one crore rupees and INR 10 crore are required to pay a 7% surcharge on tax. Those with an income of more than INR 10 crore are required to pay a 12% surcharge on tax. The Ordinance provides that companies opting for the new tax rates (15% or 22%, whichever is applicable) are required to pay a 10% surcharge on the tax payable by them under the respective provisions.
MAT reduced to 15 percent
Companies opting for reduced rate under section 115BAA or section 115BAB of the IT Act shall be exempted from MAT. For companies not opting for reduced corporate tax rate, MAT under section 115JB is reduced to 15 % from fiscal year 2019-20.
Transfer pricing provisions to apply to Manufacturing Companies opting for reduced tax rate
The definition of the Specified Domestic Transaction (SDT) contained in Section 92BA of the IT Act is amended to bring the Companies opting to be covered by section 115BAB within the ambit of Transfer Pricing. Thus, any transactions entered into by newly set up manufacturing company, opting for reduced rate of 15%, with any of its related parties (domestic or otherwise) are to be at Arm’s Length. This amendment shall be effective from fiscal year 2019-20.
Tax on buy-back of shares
Buy-back of shares refers to a company purchasing its own shares. When such purchase generates income for the company (because of an increased share price in comparison to the original issue price), the company is required to pay 20% tax on the income so generated. The Ordinance exempts certain listed companies from this requirement. These are companies which made a public announcement regarding buy-back of shares before July 5, 2019 (as per the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018).
Surcharge on capital gains
Tax and surcharge are levied on capital gains arising from transfer of securities in certain cases. These include:
- capital gains to foreign institutional investors from securities (other than the units purchased in foreign currency), and
- capital gains to individuals, body of individuals, and association of persons from certain short-term and long-term securities liable to securities transaction tax (i.e. equity shares in companies and units of equity oriented funds and business trusts).
Across globe, corporate tax rates are declining. With this tax rate reduction, India has tried to bring its tax rate in line with other countries and has given level playing field to the domestic companies. The lower tax rate of 15 percent to domestic manufacturing companies will further strengthen the Government’s “Make in India” vision.
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