Analysis of Taxation Laws (Amendment) Ordinance 2019-DhanTax

Analysis of Taxation Laws (Amendment) Ordinance, 2019

With a view to provide the much needed stimulus to corporates and push economic growth, the Taxation Laws (Amendment) Ordinance, 2019 has been promulgated by the President of India. The aim of the ordinance is to give certain tax benefits to corporates and to withdraw the enhanced surcharge from certain income arising from investment in capital market. The Ordinance has amended the Income-tax Act, 1961 and the Finance (No. 2) Act, 2019.

The key amendments include reduction in corporate tax rate to 15% in case of new domestic manufacturing companies, reduction in corporate tax rate to 22% for all domestic companies not availing of any tax exemptions, and rollback of enhanced surcharge from income chargeable to tax under section 111A, 112A and 115AD(1)(b).

The detailed analysis of amendments brought in by the Taxation Laws (Amendment) Ordinance, 2019 is as under.

1. Existing domestic manufacturing companies allowed to change its taxability from Section 115BA to new provisions

As per current provisions, a domestic company is taxable at the flat rate of 30%. However, a domestic company is taxable at the concessional rate of 25% in the following two situations:

  a) Its total turnover or gross receipt in the previous year 2017-18 does not exceed Rs. 400 crores (Part III of the First Schedule to the Finance (No. 2) Act, 2019).

  b) It opts for taxability under Section 115BA.

The existing provisions of Section 115BA of the Income-tax Act, 1961 (IT Act) provides for reduced corporate tax rate of 25% in case of domestic manufacturing companies incorporated on or after March 1, 2016. The benefit of reduced tax rate is available only when total income of the company is computed without claiming the specified deductions, exemptions or incentives available under the Act. Further, it has been provided that once a company has opted for Section 115BA then it cannot opt out from this provision in subsequent years.

Two new sections – Section 115BAA and Section 115BAB – have been inserted under the Act through Taxation Laws (Amendment) Ordinance, 2019. Section 115BAA has been inserted to provide for reduced tax rate of 22% in case of a domestic company whose total income is computed without providing for specified exemption, deduction or incentive available under the Act. Section 115BAB has been inserted to provide for a reduced tax rate of 15% in case of those domestic manufacturing companies which have been incorporated on or after October 1, 2019 and whose total income is computed without providing for specified exemption, deduction or incentive available under the Act.

Detailed analysis of the newly inserted Sections 115BAA and 115BAB have been done in subsequent part. For better understanding of the amendment made to Section 115BA, it is imperative to know about the corporate tax rates in brevity.

Provisions Tax Rate Available To Optional or Mandatory
Section 115BA 25% Old manufacturing domestic companies Optional
Section 115BAA 22% All domestic companies Optional
Section 115BAB 15% New manufacturing domestic companies Optional
First Schedule to Finance Act 25% All domestic companies subject to turnover threshold limit Mandatory
First Schedule to Finance Act 30% All other domestic companies Mandatory

If an existing domestic manufacturing company has opted for taxability under Section 115BA, the proviso to Section 115BA prohibits such companies from opting out of such provision. Thus, to enable existing companies to switch its taxability from Section 115BA to new provisions, a second proviso has been inserted to Section 115BA. The second proviso provides that if a domestic company opts for Section 115BAB, the provisions of Section 115BA shall be deemed to have been withdrawn. It appears that the reference of Section 115BAB has been inserted inadvertently and it should have been Section 115BAA. This seems to be an unintentional mistake on basis of following reasoning:

  a) A domestic manufacturing company incorporated on or after 01-10-2019 (new manufacturing co.) can opt for taxability under Section 115BA, 115BAA, 115BAB or First Schedule to Finance Act. If such company wishes to opt for Section 115BAB, being the most beneficial provision, it has to opt for this provision by on or before the due date specified under section 139(1). It is not likely that the new companies will opt for either Section 115BA (25% tax rate) or Section 115BAA (22% tax rate) in the first year of operation, when they have an option to pay tax at the rate of 15% under Section 115BAB.

  b) A domestic manufacturing company incorporated on or before 30-09-2019 (old manufacturing co.) can opt for taxability under Section 115BA, 115BAA or First Schedule to Finance Act. The option to pay tax at the rate of 15% under Section 115BAB is not available to such companies. Thus, if a domestic company has opted for Section 115BA, the only option it could have is to switch from Section 115BA to Section 115BAA and not from Section 115BA to Section 115BAB.

  c) An old manufacturing co. should be allowed to change its taxability from Section 115BA to Section 115BAA and it is possible only if second proviso to Section 115BA includes a reference to Section 115BAA rather than Section 115BAB.

2. Tax rate reduced to 22% for all domestic companies not availing of any tax exemptions or deductions

Currently, domestic companies (who are not eligible to opt for Section 115BA) are chargeable to tax at the rate of 25% if their total turnover or gross receipt do not exceed Rs. 400 crore during the financial year 2017-18 otherwise tax is charged at the rate of 30% plus applicable surcharge and cess.

In order to provide relief to certain domestic companies, a new section 115BAA has been inserted in the I-T Act with effect from Assessment Year 2020-21 to provide an option to domestic companies to pay tax at the rate of 22% plus applicable surcharge and cess. However, the option to avail the benefit of section 115BAA shall be available only when total income of the company is computed without providing for specified deductions or exemptions (discussed later).

Further, the option to avail of the benefit of Section 115BAA must be exercised on or before the due date of furnishing return of income under Section 139(1) in the prescribed manner. This option once exercised cannot be subsequently withdrawn.

3. Tax rate for new domestic manufacturing companies slashed to 15%

The Taxation Laws (Amendment) Ordinance, 2019 has inserted a new section 115BAB under the I-T Act with effect from Assessment Year 2020-21 to provide an option to pay tax at rate of 15% in case of domestic manufacturing companies incorporated on or after October 1, 2019. These companies shall have an option to opt for Section 115BAB subject to fulfilment of certain conditions.

Conditions for availing the benefit of section 115BAB

A domestic company can avail of the benefit of section 115BAB only if it fulfils the following conditions:

  a) The domestic company should be incorporated on or after 01-10-2019;

  b) It should commence the manufacturing on or after 01-10-2019 but before 31-03-2023;

  c) It must be engaged in the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it;

  d) The option to avail of the benefit of section 115BAB must be exercised on or before the due date specified under Section 139(1) for furnishing of first return of income in the prescribed manner. This option once exercised cannot be withdrawn subsequently;

  e) It must not be formed by splitting up or reconstruction of an existing business. However, this condition is not applicable in case of an undertaking formed as a result of re-establishment, reconstruction or revival in accordance with the provisions of section 33B;

  f) It does not use any building which was previously used as a hotel or a convention centre;

  g) It does not use any machinery or plant previously used for any purpose. Any plant or machinery which was used outside India shall not be treated as used for any other purpose, if following conditions are satisfied:

  ■  Before the date of installation, they were not used in India;

  ■  These assets were imported into India; and

  ■  No deduction on account of depreciation has been allowed or allowable on such plant and machinery before they were installed by the assessee

However, this condition shall be deemed to have been complied with if value of plant and machinery previously used does not exceed 20% of total value of plant and machinery;

 h) The total income of the company has been computed without claiming specified deduction, exemption or incentives (discussed later).

4. Certain exemptions or deductions shall not be available if a company opts for section 115BA, 115BAA or 115BAB

The reduced tax rate under Sections 115BA, 115BAA or 115BAB shall be available to a company if it fulfils certain conditions. One of the conditions (which is common in all these sections) is that income is computed without claiming certain specified deductions, exemption or tax incentives.

However, the Finance Minister, Smt. Nirmala Sitharaman, in her press conference held on 20-09-2019 clarified that a company who is currently availing of the tax exemptions can subsequently opt for section 115BAA or section 115BAB after expiry of the exemption period.

The various deduction and exemptions which a company opting for section 115BA, 115BAA or section 115BAB cannot claim are as follows:

Section Deduction
Section 10AA Deduction for units established in Special Economic Zones (SEZ)
Section 32AD Deduction for investment in new plant and machinery in notified backward areas
Section 33AB Deduction in respect of tea, coffee or rubber business
Section 33ABA Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India
Section 35(1)(ii) Deduction for donation made to approved scientific research association, university college or other institutes for doing scientific research which may or may not be related to business
Section 35(1)(iia) Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business
Section 35(1)(iii) Deduction for donation made to university, college, or other institution for doing research in social science or statistical research
Section 35(2AA) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research which may or may not be related to business
Section 35(2AB) Deduction for capital expenditure (excluding cost of land and building) on scientific research relating to business of bio-technology or manufacturing any article or thing
Section 35AD Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold chain facility, warehousing facility, etc.
Section 35CCC Deduction for expenditure on agriculture extension project
Section 35CCD Deduction for expenditure on skill development project
Part C of Chapter VI-A Deduction in respect of certain incomes other than specified under Section 80JJAA

Further, the company shall not be allowed to set-off of any loss carried forward from earlier assessment year if such loss is attributable to any of the aforesaid deductions. Section 10AA and Part C of Chapter VI-A provide profit linked deductions. In other words, deduction under section 10AA and Part C of chapter VI-A are allowed to the extent of profits of the company. Therefore, losses cannot arise after claiming deduction under these provisions.

Furthermore, the company shall not claim additional depreciation in respect of plant and machinery acquired and installed after March 31, 2005 and the depreciation should be computed in the manner as may be prescribed.

To check that a company opting for section 115BAB does not artificially hike its profit to get the advantage of reduced tax rate of 15%, following two safeguards have been introduced by the Ordinance:

  a) Where course of business between company opting for section 115BAB and any other person are so arranged that it produces to the company more than the ordinary profits, the Assessing Officer can re-compute the profit which may be reasonably deemed to have been derived therefrom

  b) The profit from such transaction shall be determined having regard to arm’s length price if such transaction is covered under the ambit of ‘Specified Domestic Transaction’ as defined under section 92BA of the Act.

5. Rate of surcharge in case of domestic companies

Currently, a domestic company is liable to pay surcharge at the rate of 7% in case its total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore and at the rate of 12% in case total income exceeds Rs. 10 crore.

Taxation Laws (Amendment) Ordinance, 2019 introduces a new surcharge of 10% which shall be charged from a company opting for taxability under Section 115BAA or Section 115BAB. Such surcharge shall be levied irrespective of the total income of the company.

The rates of surcharge in case of a domestic company has been enumerated below:

Company Range of Income
Up to Rs. 1 crore Above Rs. 1 crore but up to Rs. 10 crore More than Rs. 10 crore
Domestic Company opting for section 115BA Nil 7% 12%
Domestic Company opting for section 115BAA* 10% 10% 10%
Domestic Company opting for section 115BAB* 10% 10% 10%
Any other company Nil 7% 12%

* Surcharge shall be levied at the flat rate of 10% only on income offered to tax under Section 115BAA or Section 115BAB. Surcharge on all other incomes, which are taxable at the special rate, shall be levied as per the existing provisions.

6. No MAT on companies opting for Section 115BAA and 115BAB

The provisions of MAT are applicable to all types of companies except in respect of following:

  a) Income accruing or arising from the business of life insurance;

  b) Shipping company the income of which is subject to tonnage taxation;

  c) Certain foreign companies

To provide additional benefits to the companies opting for Section 115BAA or Section 115BAB, Section 115JB has been amended by the Taxation Laws (Amendment) Ordinance, 2019, to provide that the provisions relating to MAT shall not be applicable on such companies.

If an existing company, incorporated before 01-10-2019, has a MAT Credit and it opts for Section 115BAA, whether the amount of such MAT credit shall lapse or it can be utilized against the tax payable under Section 115BAA? Section 115JAA has not been amended by the Ordinance in this regard. However, it would be reasonable to conclude that the MAT credit cannot be utilized against tax payable under Section 115BAA due to following reasons:

  a) Companies have an option to pay lower tax under Section 115BAA and this option can be exercised anytime without any sunset date. If existing effective tax rate of a domestic company (after MAT Credit) is equal to or lower than the effective tax rate computed under Section 115BAA, such companies should not opt for Section 115BAA till it fully utilizes the MAT Credit;

  b) As per Section 115JAA, the MAT credit shall be allowed to set-off in the year in which tax payable on total income computed in accordance with normal provisions exceeds the tax payable under MAT provisions. When tax is not computed under the provisions of MAT, the provision of Section 115JAA may not apply and the company may not be allowed to utilize the MAT credit against tax payable under Section 115BAA.

7. Rate of MAT reduced from 18.5% to 15%

The rate of MAT under Section 115JB has been reduced from 18.5% to 15% with effect from Assessment Year 2020-2021.

8. No buy-back tax on listed Cos. that have announced buy-back of shares before July 5, 2019

The scope of Section 115QA of the Income-tax Act, which provides for levy of additional tax on companies opting for buy-back of shares, has been expanded by the Finance (No. 2) Act, 2019. It has been provided that listed companies shall also be liable to pay additional income-tax at the rate 20% on income distributed by way of buy-back of shares on or after July 5, 2019.

In order to provide relief to listed companies, which have made a public announcement of the buy-back of shares before 05-07-2019 but actual buy-back of shares happens on or after 05-07-2019, the Ordinance inserts a new proviso to Section 115QA that tax on buy-back of shares in case of such companies shall not be charged.

9. Rollback of enhanced surcharge from certain incomes

By Finance (No. 2) Act, 2019, the rate of surcharge has been increased sharply for those Individuals, HUF, AOP, BOI, Trust and Artificial Juridical Persons who fall in higher income bracket. Two new additional rates of surcharge have been introduced, i.e., 25% and 37% where income of said persons exceeds Rs. 2 crores and Rs. 5 crore, respectively.

Though the Government had enhanced the rate of surcharge with an intention to tax the high net-worth individuals but this decision severely impacted the Foreign Portfolio Investors (FPIs) who invest in India through a non-corporate organization structure, i.e., trust, AOP or BOI.

To address the concerns of FPIs and to encourage investment in the capital market, the Finance (No. 2) Act, 2019 has been amended through Taxation Laws (Amendment) Ordinance, 2019 to withdraw the enhanced surcharge from tax payable on income arising under section 111A, 112A and 115AD(1)(b).

Thus, the enhanced rate of surcharge (i.e., 25% or 37%) shall not be levied on individual, HUF, AOP, BOI and Artificial Juridical Person in respect of tax payable on income arising from transfer of following long-term or short-term capital assets:

  1. Listed equity shares

  2. Listed units of equity oriented mutual fund

  3. Listed units of business trust

Further, foreign portfolio investors (FPIs) constituted as AOP or BOI shall not be liable to pay enhanced surcharge on tax payable on any income by way of capital gains arising from transfer of any securities including derivatives. As securities held by FPIs is always treated as capital asset, therefore, enhanced surcharge shall not be levied even if securities are held by FPIs for trading purposes.

Clarification amendment has also been made to provide that the enhanced surcharge shall not be applicable even for the purposes of deduction of tax at source from income of a non-resident as referred to in Section 111A and 112A. Maximum surcharge on such income shall not exceed 15%.

10. Tax rates for Assessment Year 2020-21

After the Taxation Laws (Amendment) Ordinance, 2019, the revised tax rates for the Assessment Year 2020-21 shall be as follows:

IN CASE OF INDIVIDUAL, HUF, AOP, BOI OR AJP

Individuals being Super Senior Citizens (Age 80 years or more at any time during the financial year)

Slabs Tax Rates
Up to Rs. 5,00,000
Rs. 5,00,001 to Rs. 10,00,000 20%
More than Rs. 10,00,000 30%

Individuals being Senior Citizens (Age 60 years or more but less than 80 years at any time during the financial year)

Slabs Tax Rates
Up to Rs. 3,00,000
Rs. 3,00,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. 10,00,000 20%
More than Rs. 10,00,000 30%

Others Individuals, HUFs, AOP, BOI OR AJP

Slabs Tax Rates
Up to Rs. 2,50,000
Rs. 2,50,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. 10,00,000 20%
More than Rs. 10,00,000 30%

Rebate under Section 87A

For the Assessment Year 2020-21, in case of a resident individual, rebate up to Rs. 12,500 is allowed from the amount of tax if his total income does not exceed Rs. 500,000. Where his total income includes long-term capital gains arising from transfer of equity shares, units of equity oriented mutual fund or units of business trust as covered under Section 112A, such rebate shall not allowed from tax payable on such capital gains.

Surcharge

For the Assessment Year 2020-21, the rate of surcharge shall be as under:

Nature of Income Range of Total Income
Up to Rs. 50 lakh More than Rs. 50 lakh but up to Rs. 1 crore More than Rs. 1 crore but up to Rs. 2 crore More than Rs. 2 crore but up to Rs. 5 crore More than Rs. 5 crore
Short-term capital gain covered under Section 111A Nil 10% 15% 15% 15%
Long-term capital gain covered under Section 112A Nil 10% 15% 15% 15%
Unexplained income chargeable to tax under Section 115BBE 25% 25% 25% 25% 25%
Any other income Nil 10% 15% 25% 37%

Health and Education Cess

The health and education cess is levied at the rate of 4% on the amount of income tax plus surcharge

IN CASE OF FIRM OR LLP

Tax Rates

A firm (including LLP) is liable to pay tax at the flat rate of 30% of taxable income.

Surcharge

If total income of a firm or LLP exceeds Rs. 1 crore, the surcharge is levied at the rate of 12% on the amount of tax payable on total income.

Health and Education Cess

The health and education cess is levied at the rate of 4% on the amount of income tax plus surcharge

IN CASE OF DOMESTIC COMPANY

Tax Rates

The tax rates for the domestic company for the Assessment Year 2020-21 shall be as follows:

Section Conditions In any other case

Section 115BA

  1. The co. is set up and registered on or after 01.03.2016

  2. It is engaged in manufacture or production of any article or thing

  3. It does not claim specified exemption, incentive or deduction

25%

Section 115BAB

  1. The co. is set up and registered on or after 01.10.2019

  2. It is engaged in manufacture or production of any article or thing

  3. It commences manufacturing on or after 01-10-2019 but on or before 31-03-2023

  4. It does not claim specified exemption, incentive or deduction

15%

Section 115BAA If co. does not claim specified exemption, incentive or deduction 22%
First Schedule to Finance Act If total turnover or gross receipts during the financial year 2017-18 does not exceed Rs. 400 crore 25%
First Schedule to Finance Act Any other domestic company 30%

Surcharge

Company Range of Total Income
Rs. 1 crore or less Above Rs. 1 crore but up to Rs. 10 crore Above Rs. 10 crore
Domestic Company opting for section 115BA Nil 7% 12%
Domestic Company opting for section 115BAA* 10% 10% 10%
Domestic Company opting for section 115BAB* 10% 10% 10%
Any other company Nil 7% 12%

* Surcharge shall be levied at a flat rate of 10% only on income offered to tax under section 115BAA or Section 115BAB. Surcharge on all other incomes, which are chargeable to tax at special rate, shall be levied as per the existing provisions, i.e., at the rate of 7% or 12%, as the case may be.

Health and Education Cess

The health and education cess is levied at the rate of 4% on the amount of income tax plus surcharge

IN CASE OF FOREIGN COMPANY

Tax Rates

A foreign company is liable to pay tax at the rate of 40% of taxable income.

Surcharge

The rate of surcharge in case of a foreign company shall be 2% and 5% if its total income exceeds Rs. 1 crores and 10 crores, respectively.

Health and Education Cess

The health and education cess is levied at the rate of 4% on the amount of income tax plus surcharge

IN CASE OF LOCAL AUTHORITY

Tax Rate

A local authority is liable to pay tax at the rate of 30% of taxable income.

Surcharge

If total income of local authority exceeds Rs. 1 crore, the surcharge is levied at the rate of 12% on the amount of tax payable on total income.

Health and Education Cess

The health and education cess is levied at the rate of 4% on the amount of income tax plus surcharge

IN CASE OF CO-OP. SOCIETY OR CO-OP. BANK

Tax rates

Income range Tax rates
Up to Rs. 10,000 10%
Rs. 10,000 to Rs. 20,000 20%
Above Rs. 20,000 30%

Surcharge

If total income of co-op. society exceeds Rs. 1 crore, the surcharge is levied at the rate of 12% on the amount of tax payable on total income.

Health and Education Cess

The health and education cess is levied at the rate of 4% on the amount of income tax plus surcharge

MAT

Nature of assessee Rate
Domestic Company located in IFSC 9%
Other Companies 15%

However, the provisions of MAT shall not be applicable in case of following:

  1. Foreign companies which do not have permanent establishment (PE) in India or who are opting for presumptive taxation scheme of Section 44B, Section 44BB, Section 44BBA or Section 44BBB;

  2. Income accruing or arising to a company from life insurance business as referred to in Section 115B;

  3. A domestic company which has opted for the tax regime of Section 115BAA or Section 115BAB

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