Tax reform is taking shape

Published: November 29, 2019 1:25:29 AM

The move not only seeks to affirm the ordinance, but also seeks to validate an ‘improved’ version of the proposed legislation by addressing critical concern areas

It remains to be seen whether some of the taxpayers could actually challenge the vires of the new law to the extent it doesn’t sit well with the ratio laid down by Supreme Court in past instances.It remains to be seen whether some of the taxpayers could actually challenge the vires of the new law to the extent it doesn’t sit well with the ratio laid down by Supreme Court in past instances.

By Sumit Singhania & Gaurav Barchha

Earlier this week, the finance minister introduced the Taxation Laws (Amendment) Bill, 2019, in the Lok Sabha, to legislate reduced rates of corporate tax (22% and 15%) that were promulgated through an ordinance in September. Wholesome changes to the corporate tax rate card have certainly placed India ahead in the list of countries—not only in Asia, but also globally—with highly competitive tax rates, particularly for new manufacturing companies.

The ordinance, however, bore certain lacunae and ambiguities, largely owed to the very nature of the legislation, which must seek to prevent any unintended revenue leakages; as expected, such lacunae are now sought to be steamrolled through the amendment. At the same time, the Bill, once enacted by Parliament, ought to provide taxpayers, value judgement aside, with better decision-making ability vis-a-vis transition to the new rate regime.

Insofar as the process of law making through ordinance is concerned, as per Article 123 of the Constitution, any ordinance promulgated by the Executive under the assent of the President, such as in this case, is mandatorily required to be laid before both the Houses of Parliament and would cease to operate at the end of six weeks from the reassembly of Parliament. The move by the minister not only, therefore, seeks to affirm the ordinance, but also seeks to validate an ‘improved’ version of the proposed legislation by addressing critical concern areas.

Whilst the broad construct of 22% and 15% tax brackets have been affirmed, the Bill makes it clear that taxpayers opting for reduced tax rates must forego brought-forward credit on account of minimum alternate tax paid in years prior to the transition to lower rate regime. This is a massive outcome of the latest amendment; whilst it does bring about certainty to the regime itself and has certain economic logic underlying it, it surely comes as a bitter-sweet outcome especially for large taxpayers who would usually see MAT credit as an asset. It remains to be seen whether some of the taxpayers could actually challenge the vires of the new law to the extent it doesn’t sit well with the ratio laid down by Supreme Court in past instances.

Also, the Bill seeks to clearly articulate the fall-back and transitionary provisions, which would not only help the taxpayers plan a prudent step chart of whether to avail the lower tax regime or not, but will also serve as a guideline to the Revenue to resort to, and thus curtail any protracted litigation. Besides, the Bill seeks to also provide a ‘negative list’ of businesses, such as mining, development of computer software, etc, to fall outside the ambit of ‘manufacturing’ or ‘production’, and thus be ineligible for the 15% bracket. While a specific inclusion for power business for 15% eligibility would have helped alleviate concerns, the fact that the same has not been specifically covered within the negative list, coupled with the ratios of the courts holding power business to be engaged as ‘manufacture’/‘production’, the argument to contend a 15% eligibility stands bolstered. It is interesting that the amended law would also allow the government to include any other business in such ‘negative list’ from time to time; this effectively provides an inbuilt tool to claw back any unintended fall-outs.

To prevent abuse of lower rate, the amended law provides that non-adherence to specified conditions, which entitle taxpayers for 22/15% rate in the first place, would result in non-applicability of such a regime to taxpayers, in perpetuity thereafter. This is one bold anti-abuse rule carved-in now, and will deter reckless restructuring of businesses seeking to avail benefits through future restructuring.

It is heart-warming to see a well-intentioned tax reform finding itself rooted now in the statute, with the speed of law making. It will be but a fair ask that the law is administered in its true spirit from here, and allow businesses to create the economic advantage the government expects to leverage out of this carefully planned fiscal policy, i.e. enable an all-round ecosystem to promote private investments.

Singhania is partner and Barchha is manager, Deloitte India

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