Overview
The Government of India on Friday brought in the Taxation Laws (Amendment) Ordinance 2019 (attached) to make certain amendments in the Income-tax Act, 1961 and the Finance (No.2) Act, 2019 w.e.f. FY 2019-20. The key proposals are summarised below:
- Option given to domestic company to avail lower tax rate of 22% [i.e. 25.17% inclusive of surcharge at 10% and cess at 4%] - No exemption/incentive shall be allowed to be claimed by such companies; Additionally, no minimum alternate tax (MAT) will be levied on such companies.
- In order to give boost to ‘Make-in-India’ initiative, fresh investment in a Company set up after 1 Oct 2019 in manufacturing sector shall have an option to pay tax at the rate of 15% [i.e. 17.16% including surcharge of 10% and cess of 4%] provided such company starts manufacturing on or before 31 March 2023 - No exemption/incentive shall be allowed to be claimed by such companies. Additionally, no MAT will be levied on such companies. Domestic transactions between specified persons for the corporate claiming the reduced rate would however, be subject to arm's length pricing requirements.
- A company which does not opt for the concessional tax regime and avails the tax exemptions/incentives, shall continue to pay tax at the pre-amended rate (i.e. currently approx. 34.94%). However, these companies can opt for the concessional tax regime after the expiry of their tax holiday/exemption period; MAT rate for such companies to be reduced from 18.5% to 15%; Option once exercised cannot be withdrawn subsequently.
- Business losses of earlier years attributable to the exemptions and incentives will not be available and will lapse once the reduced rates are opted.
- No buy-back tax for listed companies for the buy backs which were publicly announced on or before 05 July 2019.
- Scope of CSR (corporate social responsibility) spending expanded to include amount spent on incubators funded by Govt or PSUs and making contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies engaged in conducting research in science, technology, engineering and medicine.
While the above amendments are a welcome boost to the Indian economy, open questions remain in relation to these announcements:
- The proposals do not have any specific mention on rates of LLPs or Alternate Minimum Tax applicable to LLPs (akin to MAT for companies). Specifically because the concessional rates for companies significantly reduces the tax arbitrage between a company and an LLP.
- Whether MAT credit carried forward from previous years would be available for set-off. With MAT not being applicable when such companies claim the reduced rate, the availability of MAT credit may be questioned.
- Whether a company incurring losses under normal provisions can opt for the reduced tax rate and not apply MAT as well, which essentially translates to zero tax cost.
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