The reduced tax rates and introduction of incentives to boost economic growth were approved by the President through the promulgation of Ordinance (Taxation Laws (Amendment) Ordinance 2019) under Article 123 of the Constitution of India. Since an ordinance is only a temporary executive measure, which cannot replace the power and function of the Parliamentary process, it had to be introduced as a bill (by presenting the same before both Houses of the Parliament) for its consideration.

Accordingly, the Hon'ble Finance Minister of India Ms. Nirmala Sitharaman presented the Taxation Laws (Amendment) Bill (Bill) on 25 November 2019 to replace the Income-tax Ordinance (Ordinance) promulgated in September 2019. On 3 December 2019, the Bill has been approved in the Lok Sabha with few changes. The Rajya Sabha has passed the bill on 5 December 2019. The bill shall attain finality after receiving President's assent.

Overall, the Bill is sought to effect the cut down on the corporate tax rates as proposed in the Ordinance and also put to rest the issues and ambiguity that arose on various points on issuance of the Ordinance.

The key differences between the Ordinance and Bill as approved in Rajya Sabha are encapsulated below:

  1. Amendments to provisions of section 115BAA and related sections (Reduced tax rate of 22% applicable to certain domestic companies):
    1. The below are the salient features introduced in the Bill that were not addressed in the Ordinance:
      1. Implications on violation of conditions for opting in: The option shall become invalid for the year in which the violation of any of the condition takes place and subsequent years. The other provisions of the Act will accordingly apply as if the option was never exercised.
      2. Fate of unabsorbed depreciation arising on account of additional depreciation: Corresponding adjustment proposed to the WDV of such block of assets – thus safeguarding the benefit. However, it is pertinent to note that such adjustment is proposed only w.r.t unabsorbed sums as on 1 April 2019. As such, it appears that companies opting in after FY 2019-20 will not be entitled to such adjustment. This appears to be an unintended consequence.

      3. Impact on losses and unabsorbed depreciation taken over by company u/s. 72A (which are attributable to any of specified deductions): Such losses and depreciation are also proposed to be covered for non-eligibility of set-off.

      4. Impact on deduction u/s. 80LA for units in International Financial Services Centre (IFSC): The Bill proposes to allow a deduction to such units even after opting for a concessional tax regime
    2. Changes in the Bill vis-à-vis the Ordinance w.r.t to section 115BAA:
      Sr. No. Key Issue Ordinance Bill approved in Rajya Sabha
      1. Minimum Alternate Tax (MAT) Credit
      		 While the ordinance was silent, CBDT had clarified that since MAT provisions in its entirety would not be applicable, the question of MAT credit set-off does not arise.

      The Bill proposes to insert section 115JAA(7) to an effect that the provisions of section 115JAA regarding carry forward and set off of MAT credit would not be applicable to person opting for concessional tax regime.
  2. Amendments to provisions of section 115BAB (Reduced tax rate of 15% for domestic manufacturing companies other than those covered in Sec 115BA and 115BAA):
    1. Following are the salient features introduced in the Bill that were not addressed in the Ordinance at all:
      1. Implication on violation of conditions of use of old Machinery or Plant and Building previously used as hotel: In such a case, the company can opt to pay taxes as per Section 115BAA at the rate of 22% plus applicable surcharge and cess. However, in case of violation of any other conditions, the option shall become invalid for the year in which the violation of any of the conditions takes place and subsequent years. The other provisions of the Act will accordingly apply as if the option was never exercised.

      2. Tax rates for other incomes earned by the company, if any

        In a nutshell, we have provided below the rates (excluding surcharge and cess):

        Nature of Income Tax rate
        Short-term capital gains from transfer of non depreciable capital asset 22%
        Income on account of Transfer Pricing adjustment under section 92BA (Specified Domestic Transactions) 30%
        All other incomes for which specific rate of tax has been provided Specified rate
        Any other incomes:
        (No deduction or allowance for any expenditure shall be allowed while computing such income)        		 22%
      3. Impact on losses and unabsorbed depreciation taken over by company u/s. 72A which are attributable to any of specified deductions: Such losses and depreciation also proposed to be covered for non-eligibility of set-off
    2. Changes in the Bill vis-à-vis the Ordinance w.r.t to section 115BAB
      Sr. No. Key Issue Ordinance Approved Bill
      1. Scope of term 'Business of Manufacture or Production'
      		 Not defined

      Bill proposes to exclude below businesses:

      - development of computer software in any form or in any media;

      - mining;

      - 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.
      2. Condition of splitting up or reconstruction – w.r.t 'Company' or 'Business' The Ordinance referred to the condition in context of the 'Company' as a whole. The Bill has rightly corrected to apply the condition w.r.t 'business' in line with other provisions of the Act having similar conditions.
  3. Other key changes:
Sr. No. Key Issue Ordinance Approved Bill
1. Surcharge – for companies No clarification on surcharge rate applicable to companies opting for the concessional rate in case of incomes other than that those eligible for 22% / 15% concessional rate Surcharge of 10% would apply not only to incomes eligible for concessional rate but also to extended categories of incomes including incomes under the head capital gains, dividends received from foreign companies etc.
2. Saving and repeal clause - The Bill proposes to repeal The Taxation Laws (Amendment) Ordinance, 2019 and to clarify that anything done or any action taken under the said Ordinance, shall be deemed to have been done or taken under the corresponding provisions of this Act

SKP's Comments

The amendments in the Bill vis-à-vis the Ordinance are aimed at closing the loose ends which were resulting in ambiguity on the interpretation front. Listed below are few of the changes:

  • Enabling provisions to opt for 22% rate for new manufacturing companies failing to meet certain stipulated conditions
  • For companies having a turnover exceeding 10 crores, benefit of reduced surcharge shall be available to extended categories of incomes including dividends from foreign companies, capital gains, etc.,
  • Inclusion of unabsorbed depreciation arising due to additional depreciation in WDV which would have otherwise lapsed. However, this benefit should have been extended without any period of limitation for opting in.

Also, specific amendment in section 115JAA restricting the utilization of MAT credit seems unfair as the same takes away the promised incentives to entities who supported the government in achieving its varied objective through incentive schemes. The benefit of tax arbitrage has in a way been taken away by bringing other players at a level playing field without any contributions.

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