Income Tax, Update

Lok Sabha Passes the Taxation Laws (Amendment) Bill, 2019

On December 2, 2019, the Lok Sabha passed the Taxation Laws (Amendment) Bill, 2019 (“The Bill”) which inter alia reduces the corporate tax levied on domestic companies. The Bill is yet to be introduced in the Rajya Sabha and once passed by both the houses will replace the ordinance promulgated by the President in September 2019. The Bill aims to make the corporate environment of the country more investor-friendly. We discuss the key features of the Bill and the implications thereof in this post.

Key Features of the Taxation Laws (Amendment) Bill, 2019

Reduced Corporate Tax Rate for Domestic Companies

Domestic companies, currently, with an annual turnover of up to INR 400 crore pay income tax at the rate of 25% and other domestic companies, pay income tax at the rate of 30%. The Bill seeks to change this and provides the companies with an option to pay income tax at the rate of 22%, given, that they refrain from claiming deductions (as provided under Chapter VI-A) under the Income Tax Act.

Reduced Tax Rate for New Domestic Manufacturing Companies

  • New domestic manufacturing companies i.e companies set up after September 30, 2019, and companies which have/would have started manufacturing before April 1, 2023, will have an option to pay income tax at the rate of 15%, provided that they do not claim deductions under the Income Tax Act.
  • The Bill further clarifies that new manufacturing companies will not include: i) companies formed by splitting up or reconstruction of an existing business ii) companies engaged in any business other than that of manufacturing or production and iii) companies which have been using plant and machinery previously used in India.
  • Apart from this, the Bill also excludes certain businesses from being covered within the manufacturing business. These include, businesses engaged in i) development of computer software ii) printing of books iii) production of cinematographic film iv) mining and v) any other business which may be notified by the central government.

Regulation of companies opting for new tax rate

Commencing, 2019-20, a company can opt for lower tax rates. Once the companies, choose this option, it shall be applicable for all subsequent years. However, the companies who exercise this option have to abide by certain conditions. For instance, domestic companies pay a surcharge at 7% if the income is between INR 1crore and 10 crores and at 10% if the income exceeds INR 10 crores. However, companies who exercise the option of lower tax rates, have to pay a blanket 10% surcharge.

Minimum Alternate Tax

  • Minimum Alternate Tax or MAT as it is commonly called refers to the minimum income tax which a company needs to pay if its tax liability falls below a certain prescribed amount. The Bill has reduced the rate at which MAT is payable from 18.5% to 15%. Please note that the ordinance promulgated in September 2020 had made the reduced rates effective from the Financial year 2019-20, which the Bill has amended and now these reduced rates will become applicable from the financial year 2020-21.
  • MAT credit is the difference between the tax paid as MAT and the normal corporate tax liability. Companies can claim the credit of such tax paid, in accordance with Section 115JAA. The Bill states that provisions pertaining to MAT as well as MAT credit will not be applicable to companies which opt for the new tax rates.

Surcharge on Capital Gains 

  • The surcharge is the amount which is paid over and above income tax. Currently, the rate of surcharge is 10% for income between INR 50 Lakhs and 1 Crore, 15% for income between INR 1-2 Crores, 25% for income between INR 2-5 Crores and 37% for income exceeding 5 crores. The Bill has separated the surcharge levied on capital gains from other income. Income without taking into account capital gains will continue to be taxed at the above rates. Capital gains will be subject to the above rates if the total income does not exceed INR 1 crore. If the total income exceeds INR 1 crore, then a blanket surcharge of 15% will be applicable to capital gains.
  • This provision is applicable only in the following cases: i) foreign institutional investor investment and ii) investment by domestic persons in securities where the securities transaction tax is paid.

Analysis of the Key Changes

The proposed changes may have the following implications:

  1. Currently, the taxes paid by companies after including surcharge and cess, range between 26%-35%. If post the passage of the Bill, a company chooses to opt for the new tax rates, the tax liability including surcharge and cess would be around 25.17%. However, what needs to be noted here, is that for some companies, maybe claiming deductions would be a better alternative to reduce their tax liability as opposed to opting for new tax rates. Companies with lesser turnover may choose to continue with the existing regime instead of opting for new tax rates as it will not make much of a difference to them, plus they will be able to reduce their tax liability by claiming deductions.
  2. Lowering of tax rates will improve the investment environment of the country and will attract more investment in domestic companies.
  3. The inability of claiming MAT credit by companies opting for new income tax rates may play a significant role in companies deciding whether to opt or not for the new income tax rates.
  4. Reduction in tax rates will also lead to a significant revenue loss to the government. How will this be recompensed is something which may play a crucial role in assessing the fiscal impact of the changes.
  5.  Reduction in tax rates will bring India at par with other tax-friendly countries and make it a good investment destination.

Conclusion

The reduction in tax rates will go a long way in making India investor-friendly. Instead of blanket reduction, an option is given, this makes the reduction in taxes even more attractive. This enables the domestic companies to plan their taxes accordingly. Moreover, offering this reduction only to domestic companies will propel foreign companies to set up more subsidiaries in India. It is a welcome step however, companies should properly assess their tax liabilities pre-reduction of taxes and post-reduction of taxes (without claiming deductions) and then make an informed choice.


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