The Finance Minister of India on 20 September 2019 announced direct tax cuts for domestic corporates with various options to choose. The corporate direct tax cut announcement led to the rise of the Sensex to 10 years high and a simultaneous rise in the surge of enthusiasm of the forces contributing towards the economy of the Country.

With the announcement of the new tax structure applicable from financial year 2019-20 India stands  as  a  preferred  nation  for  business  (especially  for  manufacturing)  along  with  China, Singapore, Denmark, Hongkong and Korea. Further, with this reduction in the corporate tax rates, the capital tax gain charged in India and the corporate direct tax rate will now fall under the same range enabling investors to choose from more investment options.

It  took India around 5  years to reach to  the reduced tax rate structure  for corporates. The exercise that first started in financial year 2015-16 is religiously followed every year to bring down the direct tax burdens.

India has never been a member of OECD however, it has appreciated and accepted the global tax practices suggested by OECD. Endorsement to the few concepts like BEPS provisions, exchange of information, beneficial owner’s definition, are the declaration of the key intent to enhance the visibility on world forum for investment and growth.

India has already emerged as service hub for various business in past 20 years. With this move of reducing the burdens for all existing domestic companies and further lowering the rate for manufacturing hubs to 15%. Further, very recently the amendments are made to allow 100% Foreign Direct Investment (“FDI”) in contract manufacturing in India.

With this further move by exercising the special power to bring the amendment in the middle of the year, which is applicable retrospectively, the world is made known for the commitment of the Government of India on “Ease of Business in India”.

The amendments have a two-way effect. One they will contribute towards the increase in investment opportunities in India, secondly, the limit on claims of exemptions and incentives to have the benefit of low tax will reduce the litigations on such exemptions and incentives claimed.

What is the relief granted 1?

Particulars	Pre-amended rates	Amended Provisions	Relief
Tax       Rate       for Domestic Company	Normal   Tax   –   30%   or 25%2 Minimum Alternate Tax (“MAT”) – 18.5%	Option  to  choose  to pay minimum tax @ 223%	Once the option is exercised, if the company was paying taxes under normal provisions, there will be a reduction of 8% taxes. MAT payable will be 0.

¹ The numbers referred are only tax rates as there is no change in surcharge and cess. Further, the numbers are exclusive of surcharge and cess which is applicable over and above this.

• Where its total turnover or gross receipt during the previous year 2017-18 does not exceed Rs. 400 crores
• The Companies which do not choose to opt for the reduced tax rate of 22% and avails the tax exemption/incentive shall continue to pay tax at the rates

 

Particulars	Pre-amended rates	Amended Provisions	Relief
Fresh investment in manufacturing companies incorporated after 1 October 2019		Reduced  tax  rate  @ 15%    provided    the company(ies) do not avail              any exemption/incentive and          commences production     on     or before     31     March 2023.	The  maximum  tax  rate for  a  corporate   will  be 30% of option not chosen as  above.  However,  the manufacturing    division is granted a concession of 15% (30%-15%)

 

Accordingly, the minimum tax rate for the Companies if the option is exercised will be as under:

 

Nature of Companies	Minimum    Tax    rate    – Subject to conditions
	Normal Provisions	MAT
Manufacturing  Company  set  up  Pre  1  October 2019      –      if      option      exercised      and      no exemption/incentive availed	22%	15%
Manufacturing  Company  set  up  Post  1  October 2019	15%	–
Trading Company	22%	–
Service Company	22%	–
If option not exercised and exemption/incentive availed	30%	15%

Countries with which parity is maintained

The  global  average  corporate  tax  rate  is  24%.  Not  long  back  corporate  tax  rates  were  not considered  as  a  defining  measure  for  the  growth  or  competitive  advantage.  However,  the recent outturn of growth in Singapore and Hongkong has forced the other countries to look around.

Currently, no country in Southeast Asia is providing a tax rate for corporate as low as 15%. As of  now  Countries  like  Bosnia,  Andorra4   provides  for  the  lowest  corporate  tax  rate  of  10%. Further, Cyprus and Ireland average out the corporate tax rate at 12.5%. List of few developing countries having corporate tax rate in the range of 15% to 25% includes Russia,

Many  countries  in  Eastern  Europe  have  lower  than  average  corporate  tax  rates,  including Uzbekistan  (7.5%),  Hungary  (9%),  Bulgaria  (10%)  and  Bosnia  and  Herzegovina  (10%).  By region, Europe has the lowest corporate tax rate at 14.48%, significantly lower than the average tax rate in Asia (21.21%), the Americas (28.03%) and Africa (28.26%).

Recently USA reduced its Corporate Income tax rate from 35% to 21% and introduced similar tax reliefs for the corporates in USA.

• A sovereign landlocked microstate on the Iberian Peninsula

In addition to the above discussed reliefs, there are certain other relief granted which includes Roll back of enhanced Surcharge on Capital Gains from sales of equity shares and units of equity-oriented mutual funds as long as the securities transaction tax was liable.

What is to be paid

For the Companies opting to choose the lower corporate tax rate of 22% and no exemption or incentive, they will be freed from the liability under MAT. However, for the corporates not having tax liability under the normal provisions due to various sector specific, industry specific or business specific exemptions and incentives (which are not available as is under MAT), the tax rate from 18.5% may be said to be increased to 22%.

Thus, an option is provided to the Companies who enjoy various tax incentive and exemptions to choose for the lower domestic tax rate of 22% in future post completion of the term of such incentive or exemptions with no MAT pay out.

Accordingly, Companies enjoying the incentives and exemptions as on date can continue to do the same and pay lower tax rate @ 15% under MAT and thereafter can also have the privilege to enjoy the lower rate of 22%.

However, the tax rate of 22% once opted cannot be withdrawn.

The Legal Battle

1. MAT Credit and Carry Forward Losses

Currently, the corporates in India are liable to pay direct tax on the profits of the Company under normal provisions or MAT provisions whichever is higher. However, the benefit of carry forward of the MAT tax paid in previous year(s) as MAT credit is available to the Companies in the future years where the normal tax is payable.

There are certain conditions for the set off which includes maximum utilisation in a year upto the difference in between the tax liability as per the normal provisions and MAT provisions. The ultimate intent behind the allowability of set off is only to the reduce the tax burden to the extent that the minimum tax @ 15% (earlier 18.5%) is payable.

As per the provisions of section 115JAA the Income-tax Act, 1961 (“the Act”), the tax credit to be allowed shall be the difference of the tax paid for any assessment year under MAT and the amount of tax payable under the normal provisions of the Act.

The question that may hurt many will be whether the tax paid under MAT @ 15% (or 18.5% in previous years) will be available for set off against the tax payable under the option of tax rate 22% payable with no MAT.

Where  the  Company  choose  to  pay  tax  corporate  direct  rate  of  22%  without  MAT,  the  tax payable under MAT will be “0” and thus, whether the MAT credit carried forward will be under the sword. It can be understood as under:

 

	Tax Payable (whichever is higher)		MAT Credit Carry forward	Remarks
Financial Year	Under Normal Provisions	Under MAT Provisions
2015-16	100	200	100
2016-17	150	250	200
2017-18	250	300	250

 

	Tax Payable (whichever is higher)		MAT Credit Carry forward	Remarks
Financial Year	Under Normal Provisions	Under MAT Provisions
2018-19	200	150	200	MAT credit utilised to the extent of excess tax payable
2019-20	88	0	112	Opted for 22% with no MAT. As no MAT applicable thus MAT credit would be allowed for complete 22%
2020-21	227	0	0

 

Similar  to  the  above,  the  domestic  corporates  are  allowed  to  carry  forward  losses  to  the subsequent 8 assessment years (under Normal Provisions) and 11 assessment years (under the MAT provisions). The domestic corporates in addition to the lower withholding tax would also like to continue the benefit of the losses until complete set off.

Amidst all this planning undergoing within the corporates, the Central Board of Direct Taxes (“CBDT”)  has  issued  a  clarification  vide  Circular  No.  29/2019  dated  2nd  October  2019 clarifying that tax credit of MAT paid  the domestic company exercising option under section 115BAA of the Act shall not be available consequent to exercising of such option.

b.  Brought Forward Business Loss

Sub-section 3 of section 115BAA provides that the loss referred to in sub-clause (ii) of sub- section (2) shall be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

The  loss  referred  to  in  sub-clause(ii)  of  subsection  2  of  section  115BAA  relates  to  the  loss attributable to the deduction claimed

1. Section 10AA – Benefit to SEZ units
2. Section 32(1)(ii) – Additional Depreciation
3. Section 32AD – Investment in Plant & Machinery in backward areas
4. Section 33AB – Tea, Rubber or Coffee Development Account
5. Section 33ABA – Site Restoration Fund
6. Section 35(1) – Sub-clause (ii) or (iia) or (iii) – Sum paid for Scientific research or
7. Section 35(2AA) – Sum paid to specified institutions for research
8. Section 35(2AB) – DSIR approved deduction
9. Section 35AD – Specified Business
10. Section 35CCC – Expenditure for Agricultural Extension Project
11. Section 35CCD – Expenditure on Skill Development Project
12. Deduction under chapter VI-A other than the provisions of section 80JJAA

Thus, the business loss arising to a domestic corporate to the extent of the deductions under the above sections will not be allowed to be set off. Thereby, the domestic corporates having normal business loss in the Profit & Loss account shall be eligible to the set off to the extent the impact of the above sections is reduced to Nil or is not there.

However, the Brought forward losses and the above calculation for segregation of loss will be subject to the litigation.

 

c.   Brought Forward Loss on account of additional Depreciation

Further, it is pertinent to mention that the clarification categorically restricts the claim of carry forward loss on account of additional depreciation.

Clause  (i)  of  sub-section  (2)  of  the  newly  inserted  section  115BAA  in  the  Act  inter-alia, provides that the total income shall be computed without claiming any deduction under clause (iia) of sub-section (1) of section 32 (additional depreciation): and clause (ii) of the said sub- section provide that the total income shall be computed without claiming set off of any loss carried  forward  from  any  earlier  assessment  year  if  the  same  is  attributable  to  additional depreciation.

Other Issues

1. The Companies will have to adjust the Deferred Tax Asset/Deferred Tax Liability recognised in the financials due to rate change. There will be impact of the same on the reserve’s balance and may leave companies with better Dividend paying capacity;

 

2. It needs a diligent consideration on whether the manufacturing units already enjoying the benefits of deductions on the Plant & machinery or the heavy investments made shall wait for the deductions to be fully consumed or by when opting for the lower rate will eventually bring break

Conclusion

All this would help India Inc in gaining more business and striving through the global crisis faced however, the impact of the same may not be visible immediate. Further, on account of additional levies like the surcharge and cess, the tax rates discussed above will increase further which at times may have a spiralling effect on the overall tax cost of organizations or on a particular transaction. However, move to cut corporate tax rate will give boost to companies in India and also companies that want to invest in India.

Also, the Companies who have already invested in India will look forward to restructuring their investment plans and the expected returns which will definitely result into profits in long run.

W S & Co. is a Chartered Accountancy firm, rendering comprehensive professional services which include Tax Consultancy – International and Domestic, Valuation, Advisory on issues covered under Double Taxation Avoidance Agreements, Expat Taxation, Audit, Management Consultancy, Accounting Services, Secretarial services etc.

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