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The Government of India slashed corporate tax rates in a historic move on September 20, 2019. The Tax Ordinance 2019 announced on the same date, introduces 2 new tax rates. The Ordinance also does away with Minimum Alternative Tax. The move is expected to cost Rs. 145,000 Crore to the Exchequer. That notwithstanding, it has done a whole lot of good to improve the sentiments of the industry.

Here are the amendments proposed.

Corporate Tax will now be 22% if…

A domestic company will now have an option to pay 22% tax (instead of 25%) on its profits. The company should satisfy the following conditions

  • No deduction is claimed u/s 10AA (tax holiday to units in SEZs) or Chapter VI-A – C “deductions in respect of certain income” (these sections again deal with tax holidays).
  • No additional depreciation is claimed; normal depreciation can, and should, be claimed.
  • No deduction is claimed u/s 32AD, 33AB, 35, 35AD, 35CCC, or 35CCD, i.e. sections pertaining to investment based deductions
  • Where the company has, in past years, incurred losses on account of deductions described above, such loss shall not be used for set off in the current year. The losses shall lapse and will not be carried forward as well.

The benefit is available for the financial year 2019-20. It is also important to note

  • Once the benefit has been availed, it cannot be reversed. Thus, it is important to choose wisely. The option shall be exercised at the time of filing the return of income and shall be applicable for every year thereafter.
  • Deduction u/s 80JJAA, i.e. with respect to employment of new employee will be available.
  • Startups availing benefit u/s 80-IAC, i.e. under the Startup India program, will have to choose between option for lower rate of tax or for the limited tax holiday of 7 years.

Companies opting for lower tax rate shall not be required to pay any Minimum Alternative Tax as well. Finally, surcharge at the rate of 10% shall be levied in addition to the tax rate in all circumstances. The effective tax rate shall be 25.168%.

Incentive for manufacturing in India.

A manufacturing company established on or after 1 October 2019 will be required to pay only 15% corporate tax. The company should satisfy the following conditions

  • The company should have commenced manufacturing before 31 Mar 2023.
  • It should not be formed by splitting up or restructuring of existing business. Further, it is not established with the use of ‘second-hand’ plant or machinery. The latter condition shall be relaxed in certain cases.
  • It should not be established in a building that was previously used as a hotel or as a convention center.
  • That the conditions vis-a-vis deductions & losses mentioned above for domestic companies (deductions u/s 10AA, etc.), will equally apply to the manufacturing company

Again, the benefit once availed cannot be reversed. These manufacturing companies need not pay Minimum Alternative Tax. Finally, surcharge at the rate of 10% shall be levied in addition to the tax rate in all circumstances. The effective tax rate shall be 17.16%.

Other changes

  • Minimum Alternative Tax rate has been reduced from 18.5% to 15%. The reduced rate shall be applicable to companies that do not opt for reduced rate of tax described above,
  • Provisions pertaining to domestic transfer pricing have been extended to manufacturing companies opting for lower tax rate. This has been done to ensure that transactions with related parties are at arm’s length and extraordinary profits are not generated by the manufacturing company,
  • Surcharge on capital gains has been reduced and is now capped to 15% (37 % previously)

The effective tax rates shall be as follows

Domestic company opting for reduced tax rate Manufacturing company set up on or after 1 Oct 2019 Others (if turnover is < Rs. 400 Crores) Others
Base rate of income tax 22.00% 15.00% 25.00% 30.00%
Base rate of MAT 0.00% 0.00% 15.00% 15.00%
Highest Surcharge * 10.00% 10.00% 12.00% 12.00%
Cess 4.00% 4.00% 4.00% 4.00%
Effective tax rate 25.17% 17.16% 29.12% 34.94%

 


In case of any questions, please do not hesitate to reach out to us on pavan@bclindia.in or ankush@bclindia.in or write to us on bclindia.in/contact/. We would be glad to be of your assistance.

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