Finance (No.2) Act 2019 had brought in certain amendments to the Income-tax Act, 1961 (the IT Act). Please Click Here to access our Budget Booklet. Subsequently, in order to attract investment, generate employment and boost Indian economy as well to make industry competitive, a fiscal stimulus was needed. As the Parliament was not in session and in view of the urgency felt in this matter, the Taxation Laws (Amendment) Ordinance, 2019 (‘Ordinance’) was promulgated on 20 September 2019. Please Click Here to read our analysis of the Ordinance. This Ordinance provided lower tax rate to specified companies. Since there were certain ambiguities, representations were made by various taxpayers. The Central Board of Direct Taxes (CBDT) had issued circular no. 29/ 2019 dated 2 October2019 clarifying on certain matters. Please Click Here to read our analysis of the Circular.
Recently, on 21 November 2019 Finance Minister repealed the ‘Ordinance’ through the introduction of The Taxation Laws (Amendment) Bills, 2019 (the Taxation Bill, 2019) before the Parliament. While this Bill is in line with the ‘Ordinance’, in light of representations made, it also contains some further amendments to provide certainty. Further, the Bill provides that anything done or any action taken under the Ordinance will be valid.
We, at BDO in India, have analyzed and summarized key amendments proposed by the Taxation Bill, 2019 to the ‘Ordinance’ and Finance (No.2) Act 2019.
Section 115BAA of the IT Act - Lower tax rate of 22 percent to domestic companies
Under Section 115BAA of the IT Act, all domestic companies can opt to be taxed at 22 percent (plus applicable surcharge and education cess) subject to fulfillment of prescribed conditions. Following are the key amendments proposed by the Taxation Bill, 2019:
- A proviso is proposed to be inserted to provide that the lower rate of 22 percent will not be available for the relevant fiscal year in which the taxpayer fails to satisfy the prescribed conditions and the subsequent years thereof. Once the option becomes invalid, other provisions of the IT Act shall apply as if the option has not been exercised for the relevant fiscal year and subsequent years.
- An additional condition is proposed to be inserted in Section 115BAA(2) of the IT Act to provide that the total income of the Company shall be computed without set-off of loss or allowance for unabsorbed depreciation under Section 72A of the IT Act (arising on account of amalgamation or demerger) if such loss or depreciation is attributable to any of the prescribed deduction.
- A proviso is proposed to be inserted in Section 115BAA(3) of the IT Act to provide that a domestic company having unabsorbed depreciation (attributable to specified deduction) shall make corresponding adjustment to the WDV of such block of assets (i.e. add back to the block) as on April 1, 2019 in the prescribed manner, if the option is exercised for the tax year beginning on April 1, 2020.
- A new sub-section (4) is proposed to be inserted to provide relaxation to Company having unit in International Financial Services Centre (IFSC). As per the proposed sub-section (4), the Company opting for 22 percent tax rate can claim deduction under section 80LA of the IT Act in respect of such unit subject to fulfillment of condition contained in section 80LA of the IT Act.
- A proviso is proposed to be inserted in Section 115BAA(5) of the IT Act to provide that in case where the option under Section 115BAB (i.e.15 percent scheme) has been rendered invalid due to violation of conditions contained therein, such taxpayers can consider opting for lower tax rate of 22 percent.
Section 115BAB of the IT Act- Lower tax rate of 15 percent applicable to domestic manufacturing companies
Section 115BAB of the IT Act provides for lower tax rate of 15 percent (plus applicable surcharge and cess) in respect of newly formed manufacturing companies subject to certain specified conditions.
- The Taxation Bill, 2019 proposes to insert few provisos to Section 115BAB(1) of the IT Act. These are summarized hereunder:
- Where the total income includes income, which is neither derived from manufacturing or production, nor incidental to such manufacture or production and in respect of which no specific rate of tax has been provided separately under Chapter XII of the IT Act, such income shall be taxed at the rate of 22 percent and no deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income;
- Where the transaction with Associated Enterprise (i.e. Specified Domestic Transaction) is not at Arm’s Length Price, the excess over the Arm’s Length Price (as determined by the tax officer) shall be taxed at 30 percent;
- Short term capital gains from sale of non-depreciable asset shall be computed at the rate of 22 percent;
- the lower rate of 15 percent will not be available for the relevant fiscal year in which the taxpayer fails to satisfy the prescribed conditions and the subsequent years thereof.
- The Taxation Bill, 2019 has proposed following amendment in Section 115BAB(2) of the IT Act:-
- Only those buildings which are previously used as hotels or convention centers and in respect of which deduction under Section 80ID of the IT Act is claimed and allowed should not be used by the company who wishes to govern by lower tax rate regime of 15 percent;
- The business of manufacture or production of any article or thing shall not include business of:development of computer software in any form or media;
- conversion of marble blocks or similar items into slabs;
- bottling of gas into cylinder;
- printing of books or production of cinematograph film; or
- any other business as may be notified by the Central Government in this behalf
- A condition similar to Section 115BAA on 'no set-off of any loss or unabsorbed depreciation' referred in Section 72A of the IT Act.
- Amalgamated Company can claim the lower tax rate if the specified conditions are satisfied;
- CBDT (with the approval of Central Government) has been given powers to issue guidelines for the purpose of removing the difficulty and to promote manufacturing or production of article or thing.
Following the Circular 29/2019 dated 2 October 2019, the Bill proposes to amend Section 115JAA of the Act to provide that set-off of MAT credit will not be available to taxpayers who have exercised the option to avail tax rate of 22 percent.
Reduced MAT rate of 15 percent to apply from Fiscal Year 2020-21
While the Taxation Bill, 2019 provides for reduced tax rate of 15 percent (which is in line with the Ordinance), the reduced rate is proposed to be effective fiscal year 2020-21. This is departure from the fiscal year 2019-20 mentioned in the Ordinance.
While the Taxation Bill, 2019 has relaxed the conditions, it has also casted additional requirement that needs to be adhered to. There are still areas left open for interpretation such as,
- Deduction of expense in relation to non-manufacturing income
- Eligibility of other income linked with manufacturing activity to claim lower tax rate of 15 percent
- What does enlarged definition of manufacturing activity includes production, intends to cover, etc.
Further, the Taxation Bill, 2019 have expanded the lower tax rate of 15 percent even to “production”. However, with the specific exclusion of development of computer software, it is made clear that the reduced tax rate of 15 percent will not be applicable to service industry especially computer software developer. Flip flop on some of these aspect merits attention and clarification. Taxpayers need to exercise caution and seek professional guidance before opting for a course of action.