India: Corporate Tax Rates Reduction – A Path Breaking Move In Reviving The Economy

Last Updated: 27 September 2019
Article by SKP  

India's economy grew at its slowest pace in the first quarter of the current fiscal year accompanied with a severe dip in consumer demand and investment. The slowdown in GDP derailed investments in sectors like automobile, manufacturing, real estate, etc. and these sectors are witnessing slump never seen before. The Indian Government is well aware of the crisis that the economy has been facing and has given a few doses of economic booster a couple of weeks back. But now it has come with the super benefit for the Indian Corporate sector. On 20 September 2019 the Indian Government has passed Taxation Laws (Amendment) Ordinance, 2019 for an amendment to the Finance (No. 2) Act, 2019 to give effect to the corporate tax cuts, removal of super-rich surcharge on capital gains tax, etc. The Key Takeaways from the announcement and ordinance are as follows:

Key Takeaways

  1. Reduction in Corporate Tax to 22% certain for domestic companies:
    • Reduction in corporate tax to 22% (effective tax rate of 25.17% after surcharge and cess) for all domestic companies from Financial Year (FY) 2019-20.
      This rate would be applicable subject to the following:
      • Company does not avail any exemption or incentives, which inter-alia includes:
        • SEZ benefits
        • Additional depreciation allowance
        • Deduction for investment in new plant and machinery in notified backward states
        • Deduction for tea/coffee/rubber development allowance or site restoration fund
        • Expenditure on scientific research, agricultural extension project, skill development project, etc.
        • Specific Tax Holidays provided in Part C of Chapter VI (like profit link deduction for SEZ development, housing projects, undertakings in specified states/areas, etc.). However, deduction in respect of employment of new employees provided u/s 80JJAA would continue to be available. This is a great thought process in the sense that although the profits linked deductions have been taken away, the incentive for generating additional employment continues.
      • Company shall not set off any loss carried forward from the prior year if such loss is attributable to any of the exemption or incentives specified above in current or subsequent year.
      • Tax return is filed by the company within the due date prescribed.
    • It may be noted that the above concessional tax rate is at an option of the taxpayer i.e. it can either opt for the concessional tax rate of 22% or continue with the current tax rate of 25%/30% with continuing the tax incentives/exemptions provided above. Once the option of a concessional tax rate of 22% has been exercised in any year, it cannot be subsequently withdrawn.
    • Companies who do not opt to apply the concessional tax rate may continue to pay at the existing corporate tax rate and continue to claim the exemption/incentive. Once the period of tax holiday/exemption expires, the companies can opt for the concessional rate.
    • The company opting for 22%, shall not be liable for Minimum Alternate Tax (MAT).
  2. Reduction in Corporate Tax to 15 % for specified manufacturing companies:
    • The concessional corporate tax rate for a new manufacturing company has been reduced to 15% (effective tax rate of 17.01%), subject to the following conditions
    • Company is incorporated after 1 October 2019 and commences production on or before 31 March 2023.
      • The company would be engaged in manufacturing/production/research in relation to such article produced.
      • All the condition specified for availing 22% rate (mentioned in point 1) to apply.
      • Such companies should not be formed by splitting up of the already existing business or by use of previously used machinery/plant or use any building formerly used as a hotel/convention center.
    • Further, Domestic Transfer Pricing provisions shall be applicable for the transaction between a new manufacturing company and related parties.
    • It may be noted that the above concessional tax rate is at an option of the taxpayer and once the option has been exercised in any year, it cannot be subsequently withdrawn.
    • The company opting for 15% tax rate, shall not be liable for Minimum Alternate Tax (MAT).
  3. Reduction in MAT rates:
    • MAT has been reduced from 18.5 % to 15%, in case of the companies which do not opt to pay tax under concessional tax rates.
  4. Rollback of enhanced surcharge:
    • Enhanced surcharge introduced in the Finance Act 2019 on individuals, HUF, Association of Person (FPIs would get covered here ) etc. on income above certain specified limit has been relaxed with respect to capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax (STT)
    • Enhanced surcharge introduced in the Finance Act 2019 shall also not apply to Foreign Portfolio Investors (FPI's) on sale of any security including derivatives.
  5. Relief from Buy-back tax:
    • Listed companies that announced buy-back of shares prior to July 5, 2019, will not be charged with buyback tax.

In addition to above tax direct reliefs, FM in its Press Note has also mentioned of expanding the scope of Corporate Social Responsibility (CSR) spending of 2% to other useful areas. It is provided in a press note that now CSR can now be spent on incubators funded by central/state governments, or any agency or PSU of central/state government, and publicly funded universities, IIT's, National Laboratories and Autonomous bodies engaged in conducting research in science, technology, engineering and medicine.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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