Taxation (Amendment) Ordinance 2019: what you need to know

Introduction

Over the years, India has witnessed a number of notable tax reforms. On 20 September 2019 – in yet another attempt to enhance the country's attractiveness as a business destination, boost investment and encourage manufacturing – the government introduced the Taxation Laws (Amendment) Ordinance 2019, which amended the Income Tax (IT) Act 1961 and the Finance (No 2) Act 2019.

Finance Minister Nirmala Sitharaman has made significant cuts to India's corporate tax rates. In addition, the recent Goods and Services Tax Council meeting introduced a host of measures to boost market sentiment. These amendments are expected to have a positive impact on the Indian economy.

Video summary

A video summary is available here. 

Key amendments

Corporate tax rate reduced to 22% for all domestic companies

The ordinance has inserted a new Section 115BAA into the IT Act. Thus, as of fiscal year 2019-20, all domestic companies can choose to be taxed at the rate of 22% (plus applicable surcharge and cess), provided that they do not avail of specified exemptions or incentives.

A 10% surcharge will be levied. Accordingly, the effective tax rate for companies opting to pay tax under Section 115BAA of the IT Act will be 25.168%.

Domestic companies that avail of this reduced rate will not have to pay minimum alternate tax (MAT) under Section 115JB of the IT Act, currently levied at 18.5% of book profits.

The ordinance clarifies that companies that do not wish to avail of this concessional rate immediately can opt to do so once applicable exemptions or incentives have expired. However, once a company opts to be governed by Section 115BAA of the IT Act, it cannot subsequently opt out.

Corporate tax rate reduced to 15% for new manufacturing companies

The ordinance has inserted a new Section 115BAB into the IT Act, under which a reduced tax rate of 15% (plus applicable surcharge and cess) will apply to manufacturing companies which:

• were set up and registered on or after 1 October 2019 and commence manufacturing on or before 31 March 2023;
• were not formed by splitting up or reconstructing an existing business (a certain level of relaxation applies in this regard);
• use no machinery or plant previously used for any purpose (a certain level of flexibility applies in this regard);
• are not engaged in any business other than the manufacture or production of goods or research in relation to, or the distribution of, such goods; and
• do not avail of specified exemptions or incentives.

Taxpayers have the option of availing of the reduced tax rate. However, once a taxpayer opts to be governed by Section 115BAB of the IT Act, they cannot subsequently opt out.

A 10% surcharge will be levied. Hence, the effective tax rate for companies which opt to pay tax under Section 115BAB of the IT Act will be 17.16%.

Companies which opt for a reduced rate under Section 115BAB of the IT Act will be exempted from MAT.

Effective tax rates

Following the above amendments, the effective tax rates (including applicable surcharge and 4% education cess) for domestic companies are as follows.

Transfer pricing provisions apply to manufacturers which opt for reduced tax rate

The definition of a 'specified domestic transaction' (SDT) contained in Section 92BA of the IT Act has been amended to include companies which opt to be covered by Section 115BAB within the ambit of transfer pricing. Thus, any transactions entered into by a newly established manufacturing company which opts for a reduced rate of 15% and a related party (domestic or otherwise) must be at arm's length. This amendment is effective from fiscal year 2019-20.

MAT rate reduced to 15%

Companies which opt for a reduced rate under Sections 115BAA or 115BAB of the IT Act will be exempted from MAT. For companies which do not opt for a reduced corporate tax rate, MAT under Section 115JB is reduced to 15% from fiscal year 2019-20.

No retrospective application of buy-back tax for listed companies

As of 5 July 2019, the Finance (No 2) Act 2019 brought the buy-back of listed companies within the ambit of tax under Section 115QA of the IT Act. Instances where a public announcement for buy-back was made before 5 July 2019 but the necessary approvals were not received until 5 July 2019 also fell within the ambit of Section 115QA of the IT Act and were subject to buy-back tax. In order to provide relief in such cases, the ordinance has inserted a proviso into Section 115QA of the IT Act to provide that buy-back tax does not apply to listed companies where a public announcement in respect of buy-back was made before 5 July 2019.

Surcharge rate relaxed

The Finance (No 2) Act 2019 introduced increased surcharges of 25% and 37% of income tax if the total income exceeds Rs20 million or Rs50 million, respectively. The ordinance provides relief from these increased surcharges in case of 'foreign institutional investors', as referred to in Section 115AD of the IT Act, in respect of income from capital gains which arise on the sale of securities.

The surcharge in respect of capital gains covered by Sections 111A and 112A of the IT Act is capped at 15%. The revised surcharge rate is as follows.

Comment

Corporate tax rates across the globe are declining. With the introduction of the Taxation Laws (Amendment) Ordinance 2019, India has tried to bring its tax rate in line with other countries and has given domestic companies a level playing field. The lower tax rate of 15% for domestic manufacturing companies will further contribute to the government's 'Made in India' vision.

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