India’s economy grew at its slowest pace in the first quarter of the current fiscal year accompanied by 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 a slump never seen before. The Indian Government was aware of the crisis the economy has been facing and gave a few doses of economic booster a couple of weeks back.

The Government announced some major tax reforms for the corporate sector on 20 September 2019, such as a reduction in corporate taxes for certain domestic companies, special corporate tax rates for new manufacturing companies subject to conditions, reduction in the minimum alternate tax rate, etc. Shortly afterward, on 20 September 2019, the Indian Government passed Taxation Laws (Amendment) Ordinance, 2019 for giving effect to the corporate tax cuts, removal of super-rich surcharge on capital gains tax, etc. The Key Takeaways from the announcement as well as the ordinance are as follows :

Reduction in Corporate Tax to 22% for certain 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 subject to the following conditions :
  • the company does not avail any exemption or incentives, which inter-alia includes the following :
    • 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 in the sense that although the profits linked deductions have been taken away, the incentive for generating additional employment still continues.
  • The company shall not set off any loss carried forward from the preceding year if such loss is attributable to any of the exemption or incentives specified above in the 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% along with the tax incentives/exemptions provided above. Once the option of 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 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).

Reduction in Corporate Tax to 15% for specified manufacturing companies

  • The concessional corporate tax rate for new manufacturing companies has been reduced to 15% (effective tax rate of 17.01%), subject to the following conditions :
    • The 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 an article produced.
    • All the conditions specified for availing 22% rate (mentioned in point 1) to apply.
    • Such companies should not be formed by splitting up of 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 the 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).

Reduction in MAT rates

MAT has been reduced from 18.5% to 15%, in case of companies that do not opt to pay tax under concessional tax rates.

Relief from Buy-back tax

Listed companies that announced buy-back of shares prior to 5 July 2019, will not be charged with buyback tax.

Corporate Social Responsibility spending extended to other areas

The scope of Corporate Social Responsibility (CSR) spending of 2% has been extended to other useful areas such as incubators funded by central/ state governments, or any agency or PSU of central/state government, and publicly funded universities, IITs, National Laboratories and Autonomous bodies engaged in conducting research in science, technology, engineering and medicine.

Concluding Thoughts

These reforms are path-breaking and would lead to improvement in sentiment of capital markets and strengthen the economy. Reduction in corporate tax rate by almost 10% for the existing corporates would leave such companies with a lot of disposable surplus in their hands which would stimulate much needed investment in other sectors, thus bolstering by such corporates which in turn would generate new employment and revive economy. Encouraging setting up of manufacturing units would give a great stimulus to ‘Make in India’ initiative of Government, promote the ease of doing business in India, boost overall profitability of corporate India and promote more employment. Now, Indian Corporate tax rate would be comparable to many developed countries, which would lead to increase in Foreign Direct Investment (FDI) in India.

It would be important to note that all the benefits are provided to a Company structure, which would mean that Limited Liability Partnership (LLP) would continue to be taxed at higher rates. This may dilute the LLP structure, as the benefit of no Dividend Distribution Tax (DDT) may be offset against the higher tax rates for LLP. However, one will have to evaluate the entire cost benefit before taking any decision. Also, these amendments further increase the gap between the corporate tax rates of domestic companies visà- vis foreign companies (i.e. 25.17% vs 43.68%). This may be something that can be looked at by the government. It would become imperative for companies availing the tax incentives to carry out a cost-benefit analysis for opting for new rates vis-à-vis continuing with old rates.

It would become imperative for companies claiming tax exemption to carry out a tax benefit analysis to determine whether they should opt for the new tax rates or not. Also the impact on MAT tax credit should be evaluated.

To sum up it’s early Diwali for the corporates and the Capital Market and soon it would have a rubbing effect on the overall economy. It should definitely have a positive impact on the taxpayers and would infuse confidence of the foreign investors in the economy.