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Tax Alert: The Taxation (Amendment) Ordinance 2019

21 September 2019

On 20 September 2019, the Government of India introduced the Taxation Laws (Amendment) Ordinance, 2019 (‘the Ordinance’). Through this Ordinance, amendments are made to the Income-tax Act, 1961 (IT Act) and the Finance (No 2) Act, 2019.

We, at BDO in India have summarised the amendments made by this Ordinance.

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 percent (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 percent.

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 However, once a company opts to be governed by section 115BAA of the IT Act, it cannot be subsequently withdrawn.

Corporate tax rate reduced to 15 percent for new manufacturing Companies

The Ordinance has inserted another new section – section 115BAB in the IT Act. As per this section, reduced tax rate of 15 percent (plus applicable surcharge and cess) shall be applicable to manufacturing companies fulfilling following conditions:

  • The Company has been set-up and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023
  • The Company is not formed by splitting up, or the reconstruction, of a business already in existence. Certain relaxation is provided on applicability of this condition.
  • The Company does not use any machinery or plant previously used for any purpose. Certain relaxation is also provided on applicability of this condition.
  • The Company is not engaged in any business other than business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it.
  • The Company does not avail specified exemptions/ incentives.

The reduced tax rate shall be at the option of the taxpayer. However, once the taxpayer opts to be governed by section 115BAB of the IT Act, it cannot be subsequently withdrawn.

Surcharge at the rate 10 percent shall be levied. Hence, the effective tax rate for Companies opting to pay tax under section 115BAB of the IT Act shall be 17.16 percent.

Companies opting for reduced rate under section 115BAB of the IT Act shall be exempted from MAT.

Effective Tax Rates

With above amendments, the effective tax rates (including applicable surcharge and 4 percent education cess) for Domestic Companies are tabulated hereunder:

Total Income (INR)

Where turnover in fiscal year 2017-18 does not exceed INR 4 bn

Companies opting to be governed by section 115BA

Companies opting to be governed by section 115BAA

Companies opting to be governed by section 115BAB

Company not covered by (2) to (5)

(1)

(2)

(3)

(4)

(5)

(6)

Upto 10 mn

26.00%

26.00%

25.168%

17.16%

31.20%

10 mn – 100 mn

27.82%

27.82%

25.168%

17.16%

33.384%

Above 100 mn

29.12%

29.12%

25.168%

17.16%

34.944%

 

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.

Minimum Alternate Tax rate 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 percent from fiscal year 2019-20.

No retrospective application of Buy-back tax for Listed Companies

Finance (No. 2) Act, 2019 had brought the buy-back made by listed Companies within the ambit of tax under section 115QA of the IT Act. This amendment is effective from 5 July 2019. There were instances where public announcement for buy-back were made before 5 July 2019 but necessary approvals received post 5 July 2019. Such cases also came within the ambit of section 115QA of the IT Act and would be subject to buy-back tax. In order to give relief to such cases, the Ordinance has inserted a proviso to section 115QA of the IT Act to provide that the buy-back tax shall not apply to listed Companies where public announcement with respect to buy-back was made before 5 July 2019.

Surcharge rate relaxed

  • The Finance (No 2) Act 2019, introduced increased surcharge at 25 percent and 37 percent of income-tax apply if the total income exceeds INR 20mn and INR 50mn, respectively. The Ordinance provides relief from the increased Surcharge in case of a Foreign Institutional Investors as referred in section 115AD of the IT Act, in respect of income from capital gains arising on sale of securities.
  • The surcharge rate in respect of capital gains covered by section 111A and section 112A of the IT Act capped at 15 percent. The revised surcharge rate is tabulated hereunder:

Total Income (INR)

Income other than Capital gains covered under section 111A and section 112A

Capital gains covered under section 111A and section 112A

(1)

(2)

(3)

Upto 5mn

NIL

NIL

5mn – 10mn

10%

10%

10mn – 20mn

15%

15%

20mn – 50mn

25%

15%

Above 50mn

37%

15%

 

Concluding Remarks

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.