Booster for Indian Economy through Tax Law Amendments 2019
- Goods and Services Tax
- Oct 7, 2019 | Viren Shah
Taxation Laws (Amendment) Ordinance 2019 & 37th GST Council Meeting
The Indian Government has in last few weeks made various announcements in order to revive the Indian economy. On 20 September 2019, the Ministry of Finance (‘MoF’) has announced various tax measures such as reduce corporate tax rates, providing stimulus to ‘Make in India’ initiative, etc. The changes to the tax laws were announced through an ordinance and are immediately enacted into the existing tax laws. Hence, they are effective from the current Financial Year (‘FY’) i.e. from 1 April 2019. Given below is summary of the amendments made under the tax laws.
- Reduction in corporate tax rate for existing domestic companies - A new provision has been inserted into the law which provides concessional tax rate of 22% (effective tax rate of 25.17%, including surcharge of 10% and cess of 4%) for all domestic companies, subject to fulfillment of certain conditions.
The domestic companies availing such reduced rate will not be eligible to claim exemptions / incentives such as deduction for units under Special Economic Zone, accelerated tax depreciation, tax holidays for specified units, expenditure on specified business / project, etc., except deduction for additional wages to employees.
It also provides that existing domestic companies availing such reduced rate will not be required to pay Minimum Alternate Tax (‘MAT’) - currently levied at 18.5% of book profits (effective tax rate ranges from 19.24% - 21.55%, considering surcharge and cess). Further, the MoF, vide Circular No. 29/2019 dated 2 October 2019, clarified that the companies opting for concessional tax rate of 22% will not be eligible to claim set off of any MAT credit and brought forward loss on account of additional depreciation.
The provision further provides that once the option is exercised for concessional tax rate on or before the due date of filing of the tax return, it cannot be subsequently withdrawn.
- New tax rate for new companies engaged in manufacturing activities - A new provision has been inserted into the law which provides concessional tax rate of 15% (effective tax rate of 17.16%, including surcharge of 10% and cess of 4%) for all new domestic manufacturing companies, subject to fulfillment of certain conditions.
In order to avail such concessional tax rate, the companies should be registered and set up on or after 1 October 2019 and commenced manufacturing on or before 31 March 2023. It should not be formed by splitting up, or the reconstruction, of a business already in existence. It does not use any second-hand plant or machinery, subject to certain exception. It will not be eligible to claim exemptions / incentives (as mentioned above under reduction in corporate tax rate for existing domestic companies).
It is also provided that the new manufacturing companies which are opting for such concessional tax rate will not be subject to MAT.
Further, the transactions between such domestic manufacturing companies and person closely connected with it will be subject to transfer pricing.
The provision also provides that once the option is exercised for concessional tax rate on or before the due date of filing of the tax return, it cannot be subsequently withdrawn.
- Domestic companies which are continuing to avail exemptions / incentives will be taxable at the rate, which are applicable before the announcement made through ordinance. However, once the period for claiming exemptions / incentives expires, the companies will have an option to be taxed at concessional rate of 22%, as mentioned above.
Comparative chart providing current tax rates (under existing regime) and concessional tax rates (announced through ordinance)
|Sr. No.||Particulars||Tax Rate*||MAT applicability|
|Existing tax regime|
|1||Domestic companies where turnover does not exceed INR 4bn in FY 2017-2018||26% - 29.12%||Yes|
|2||Domestic companies where turnover is more than INR 4bn in FY 2017-2018||31.20% - 34.94%||Yes|
|3||Domestic manufacturingcompanies (set up on or after1 March 2016)||
26% - 29.12%
Concessional tax regime
|4||All Domestic companies||25.17%||No|
|5||New manufacturing companies (registered and set-up on or after 1 October 2019)||17.16%||No|
* depending on total income of the companies
- Reduction in MAT rate - The ordinance provides that MAT rate has been reduced from 18.5% to 15% for all companies which are subject to MAT provisions. This will result in tax savings of 3.5% for companies which are subject to under MAT provisions.
- Relief from buy-back tax - The existing tax law provides for levy of buy-back tax of 20% in cases where the buy-back of shares are undertaken by unlisted companies. Any income arising from buy-back of shares is exempt from tax in the hands of the shareholder.
The Finance Act, 2019 extended the applicability of buy-back tax to listed company’s shares and it came into effect from 5 July 2019 (i.e. from the date of announcement of the budget). There were instances where the companies have made public announcement for buy-back of its shares before 5 July 2019, but necessary SEBI approvals were received post 5 July 2019.
The ordinance clarifies that the buy-back tax will not be applicable where a public announcement, as per SEBI Regulations, for buy-back of listed company’s shares was made before 5 July 2019.
- Relief of enhanced surcharge rate - The Finance (No. 2) Act, 2019 introduced enhanced surcharge rate of 25% and 37% for Foreign Portfolio Investors (‘FPIs’) [constituted as Trust, Association of Persons (‘AOP’), etc.], resident individuals, AOP, etc., having income above specified limit.
The ordinance clarifies that enhanced surcharge rate will not be applicable to capital gains arising to FPIs from sale of securities (including derivatives). It is to be noted that the enhanced surcharge rate will be applicable to other income (say, interest income) of FPIs.
Separately, it also clarifies that the enhanced surcharge rate will not be applicable to capital gains arising to any individuals, AOP, etc., on transfer of equity shares in a company, a unit of an equity-oriented fund, a unit of a real estate investment trust, or a unit of an infrastructure investment trust, which are subject to securities transaction tax.
Goods and Service Tax (‘GST’) is another tax which is expected to provide the much-needed stimulant for economic growth in India. The taxpayers were expecting some relief from 37th GST Council meeting for the economy in general, as well as for certain sector such as automobile in particular. However, the Finance Minister, just before the GST Council meeting on 20 September, made big announcement for reduction in corporate tax rate and decisions taken at the GST Council meeting lost significance, since there were no path breaking announcement (as compared to income-tax announcement). In the recently concluded 37th GST Council meeting, there were several decisions ranging from relaxations in filing of annual return, revisions in tax rate, deferment of new GST returns, new GST exemptions and certain clarifications. Given below is brief update thereon:
- The GST Council announced that the composition dealers and other taxpayers with a turnover of up to INR 20mn will not be required to file annual return in Form GSTR 9A and GSTR 9 respectively for FYs 2017-2018 and 2018-2019.
- With festive season and holiday season around the corner, the lower tax rates announced by the GST Council will give a boost to tourism and hospitality sector. The Council did not provide any specific relief to the automobile industry.
- The GST rate on caffeinated drinks has been raised from 18% to 28%, plus there will be an additional cess of 12%.
- The Council also announced that the new return system which was to be introduced from October 2019 will now be introduced from April 2020.
- Further, the GST Council cancelled the controversial Circular No. 105/24/2019-GST, which attempted to clarify various doubts relating to post-sales discounts.
The reduction in corporate tax rate will enable companies to optimize their cash flows, leading to increased investments. It will also widen the tax net and will gradually bring more revenues to government. Overall, the move will make Indian companies globally competitive, a welcome step to lift up the market sentiments. This is a great step towards the goal of a USD 5 trillion economy by 2025.
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