Corporate tax cut: A bold move by the Modi Government

Updated: September 26, 2019 1:39:05 AM

Manufacturing sector is likely to get a boost with the headline tax rate for newly incorporated domestic manufacturing companies being reduced to 15%.

Finance minister Nirmala Sitharaman (file photo)Finance minister Nirmala Sitharaman (file photo)

By Vishal Anand

With the approaching festive season, corporates and investors have been given an early present as finance minister Nirmala Sitharaman has proposed certain tax rate reductions and other relief aimed at boosting the economy and promoting growth and investment. These proposals will be brought in through the Taxation Laws (Amendment) Ordinance 2019 that will make certain amendments to the Income-tax Act 1961 (Act) and the Finance (No. 2) Act 2019. These amendments are mainly in relation to reduction of income-tax rates for domestic companies. The key features are:

Headline tax rates for domestic companies reduced to 22%: A new provision will be inserted into the Act (Section 115BAA), providing a domestic company with an option to pay income-tax at the rate of 22% (plus applicable surcharge and cess), subject to condition that while computing total income, they will not avail any exemption/incentive such as deduction under Section 10AA, accelerated depreciation, additional depreciation, investment allowance, deduction of capital expenditure on specified business and expenditure on scientific research or claimed any set-off any brought-forward losses attributable to such deductions, etc.

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This amendment has been aimed at promoting growth and investment and will come into effect from assessment year (AY) 2020-21 onwards. The option is required to be exercised on or before the return filing due date, and once the option is exercised, it cannot subsequently be withdrawn. Further, domestic companies opting for such concessional tax regime will not be required to pay the minimum alternate tax (MAT). The tax rate for companies opting for this regime is to be increased with a surcharge of 10% regardless of the quantum of income.

For domestic companies that decide not to opt in for this concessional tax regime and continue to claim tax holiday/incentives will continue to pay income-tax at the prevailing rate of 25%/30% (plus applicable surcharge and cess), depending on the turnover threshold of `400 crore for FY18. However, the headline MAT rate has been reduced from 18.5% to 15% with effect from AY2020-21. Such companies can also opt in for the concessional tax regime after the expiry of tax holiday/exemption period.

Reduced tax rate of 15% to domestic manufacturing companies: To provide a boost to the ‘Make in India’ initiative and attract fresh investments in manufacturing, a new provision is proposed to be introduced (Section 115BAB) to provide an option to a newly incorporated domestic manufacturing company to pay tax at a rate of 15% (plus applicable surcharge and cess). This option is available to a domestic company subject to the following conditions:

It is incorporated on or after October 1, 2019, and commences its production on or before March 31, 2023, and (i) is not be formed by splitting up/reconstruction of business already in existence, (ii) does not use any previously used machinery or plant, and (iii) does not use any building that was previously used as a hotel or a convention centre;
It is engaged solely in the business of manufacture or production of an article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and
While computing its total income, it has not availed any exemption/incentives such as deduction under Section 10AA, accelerated depreciation, additional depreciation, investment allowance, deduction of capital expenditure on specified business and expenditure on scientific research or claimed any set-off any brought-forward losses attributable to such deductions, etc.

The above option is required to be exercised on or before the return filing due date, and once the option is exercised, it cannot subsequently be withdrawn.

Domestic companies opting to be taxed under this regime will not be required to pay MAT. Similar to above, the tax rate for companies opting for this regime is to be increased with a surcharge of 10% regardless of the quantum of income.

With the reduced tax rates for domestic companies, India will now be on a par with the global economy. Manufacturing sector is likely to get a boost with the headline tax rate for newly incorporated domestic manufacturing companies being reduced to 15%. The proposed measures and amendments will provide a fillip for both domestic and foreign investments, which will provide a boost to India’s economy.

The author is partner, Corporate & International Tax, PwC India

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