Government of India announces massive reduction in Corporate Tax Rates

In order to spur economic growth and investment, the Government of India has passed the Taxation Laws (Amendment) Ordinance, 2019 to provide for massive reduction in corporate income tax rates for FY 2019-20. These changes come into force with immediate effect. The highlights of these announcements made by the Government through a Press Note on 20 September 2019 are summarised below, for ready reference.

The announcements made raise certain questions as regards their application which could become clear once the bare provisions of the amended law are available in public domain. Hence, it is advisable to peruse the precise wording used in law before taking any decision based on these announcements

Key Highlights

1. Reduction in Headline Corporate Tax rate to 22%

§ The Headline Corporate Tax rate for all domestic companies has been reduced to 22% from the existing rate of 25% / 30%, as applicable.

§ The reduced rate of 22% shall apply to companies which do not claim any investment-linked or profit-linked incentives and exemptions.

§ Companies opting for the 22% headline rate shall not be liable to pay Minimum Alternate Tax (MAT)

§ The Government has stated that the effective tax rate will be 25.17%. Based on the current rates of surcharge and education cess, it is not presently clear as to how the 22% headline rate will translate into an effective tax rate of 25.17%

Key Takeaways:

§ It appears that the reduction in tax rates will apply to all future years and is not expected to be limited to FY 2019-20

§ It appears that the reduction in the corporate tax rate shall apply to all companies, including companies engaged in service sector and trading operations

§ Considering the effective tax rate of 25.17%, it appears that the existing rates of surcharge may also undergo a reduction

§ What would be the position of existing MAT credit needs clarification in light of exemption from payment of MAT in future years. This is particularly significant for units located in Special Economic Zones (SEZ) which could have sizeable MAT credit

§ The advance tax payments for Quarter 3 and 4 of FY 2019-20 will see a significant drop since the advance tax for earlier instalments would have been paid at pre-amended rates.

2. Concessional Corporate Tax Rate of 15% for newly set up manufacturing companies

§ Newly set up companies making fresh investment in manufacturing sector shall be eligible for a concessional income tax rate of 15% plus surcharge and cess

§ This rate will apply to companies incorporated after 1st October 2019 and which commence their manufacturing activities by 31 March 2023

§ Such companies shall not be liable to pay Minimum Alternate Tax (MAT)

§ Such companies shall not be eligible to claim any investment-linked or profit-linked incentives and exemptions

§ The Government has stated that the effective tax rate will be 17.01%. Based on the current rates of surcharge and education cess, it is not presently clear as to how the 15% headline rate will translate into an effective tax rate of 17.01%

Key Takeaways:

§ The benefit of concessional tax rate of 15% shall apply to newly incorporated companies. It appears that the benefit does not extend to newly set up units of existing companies.

§ The benefit of 15% does not extend to service entities and trading entities

§ It is presently not clear whether the tax rate of 15% shall apply to newly set up entities which are engaged in manufacturing, trading and service activities

§ Considering the effective tax rate of 17.01%, it appears that the existing rates of surcharge may also undergo a reduction

§ It is expected that suitable anti-abuse provisions will be inserted in the law to provide that existing companies cannot avail the benefit of 15% tax rate through artificially splitting up or reconstruction of existing businesses

§ It is also expected that the Government will introduce minimum monetary threshold for investment in plant and machinery

§ The benefit may not be available for units set up through second-hand plant and machinery. There is no official clarification in this regard at present

§ Corporate restructuring activities (e.g. demerger) should factor in the benefit of reduced tax rates. However, any such restructuring activity should be for genuine business purpose. Where the primary reason for restructuring is to avail benefit of lower tax rate, such benefit may be denied under the General Anti-Avoidance Rules (GAAR)

3. Concessional tax rate of 22% / 15% is optional

§ The concessional tax rates of 22% or 15% are optional. A company can opt to claim tax exemptions and incentives and pay tax at the pre-amended rate of 25% / 30% as applicable

§ Such companies will be allowed to opt for the reduced tax rate of 22% after the expiry of the tax holiday/incentive period

§ This option shall be a one-time option and once exercised, cannot be withdrawn

Key Takeaways:

§ Companies availing tax exemptions and incentives (e.g. units located in SEZ or industrially backward areas) need to do a comparative analysis of their effective tax rates as a percentage of revenue to decide whether it is more beneficial to claim the tax incentive or whether they should opt for the lower tax rates

§ The Press Note states that after the tax holiday period, the rate of 22% would apply. It is not clear whether a newly set up manufacturing company which does not opt for the 15% tax rate, shall also be liable to tax @ 22%. It is hoped that a clarification would be provided that in cases of such manufacturing entities, the tax rate will be 15% after the expiry of tax holiday period

§ It is not clear whether a company can give up the tax holiday before the expiry of the statutory tax holiday period to opt for the tax rate of 22% / 15% or whether the company will have to make this choice at present.

4. Enhanced surcharge introduced by Finance Act, 2019 not to apply in certain cases

§ The Finance Act, 2019 introduced enhanced surcharge for non-corporate assessees (other than partnership firms and LLP)

§ Surcharge was applied at 25% where taxable income exceeded INR 2 crore (INR 20 million) and at 37% where taxable income exceeded INR 5 crore (INR 50 million)

§ As per the recent announcement, the enhanced surcharge of 25% / 37% shall not apply in respect of capital gains arising from sale of equity shares of a company, units of equity oriented mutual funds and units of a Business Trust, where the sale transaction is liable to Securities Transaction Tax

Key Takeaways:

§ Relief from enhanced surcharge has been granted only for listed shares. The relief does not extend to sale of shares of a private limited company

§ Also, the relief from enhanced surcharge is only in respect of capital gains. Where the income from sale of shares is classified as business income based on facts of each particular case, the enhanced surcharge shall continue to apply

§ The relief from enhanced surcharge does not cover income other than capital gains. Therefore, the tax liability on income from salaries, business income, etc. shall not change

5. Reduction in rate of MAT from 18.5% to 15%

The rate of MAT has been reduced from 18.5% to 15% in case of companies which do not opt to pay tax under the concessional tax rates of 22% /15%

6. Relief from BuyBack Tax

§ The Finance Act, 2019 extended the Buy Back Tax at the rate of 20% to listed companies from 5 July 2019

§ The Government has now clarified that listed companies which had announced buy-back schemes before 5 July 2019 will not be required to pay Buy-Back Tax

Our Comments

The Government must be lauded for taking a bold and aggressive step to boost economic growth in the present investment climate. These relief measures are a shot-in-the-arm for the economy at large. Certain open questions remain as regards the applicability of these measures in specific scenarios. It is expected that these questions will get answered once the bare law is available in public domain and through specific clarifications from the Government.

These relief measures present a strong case for carrying out a tax review of existing business operations to ascertain how best can a business benefit from the reduced tax rates. The sooner this review is taken up, the better it will be for the business to get ready to benefit from the ‘bonanza’ provided by the Government.

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