The government today announced a slew of changes to the corporate tax laws through Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act, 1961 and the Finance (No. 2) Act 2019.
Evidently, the measures are aimed at boosting investment in India and supporting Make in India initiative. Domestic companies would now have an option to pay income tax at the rate of 22 percent subject to condition that they will not avail any exemption/ incentive. This is a welcome move and also in line with the government’s intention of lowering tax rates and phasing out of incentives announced four years ago. Also, such companies shall not be required to pay Minimum Alternate Tax.
Further, in order to provide a strong fillip to manufacturing sector, the corporate tax rate is further slashed to 15 percent for new manufacturing companies incorporated after October 1, 2019 which commence production before March 31, 2023 (current incentives/ exemptions under Indian income-tax law would not be available to such companies either).
Concessional tax regime
For a company that does not opt for concessional tax regime and avails the tax exemption/ incentive shall continue to pay tax at the pre-amended rate, with an opportunity to opt for the concessional tax regime after expiry of their tax holiday/ exemption period. Option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5 percent to 15 percent. We expect a lot of corporations to now do a comparison of their tax costs under their existing scheme of things vis-à-vis the concessional (but without incentives) option for getting taxed. Such a comparison also becomes important keeping in mind the brought forward losses attributable to such deductions/ exemptions.
The Finance Minister in her budget speech 2019 had said that the increase in threshold to Rs 400 crore (from the earlier Rs 250 crore) would cover 99.3 percent of the companies who would be eligible to avail 25 percent tax rate on their profits. While the amended tax rate would benefit all companies, however, the balance 0.7 percent companies, that contribute a significant portion of the total tax collections of the government, may now benefit from the reduced rate, resulting in a higher after-tax profit for such entities which may be mobilised by them for further investments.
The enhanced surcharge introduced by the Finance Act 2019 would not apply on capital gains arising on sale of equity shares in a company or a unit of an equity-oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of specified persons (excluding companies). The enhanced surcharge shall also not apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs). The capital markets had seen a selling splurge when the enhanced surcharge was introduced earlier this year. This move will surely contribute in stabilising the fund flow and promote investment in capital markets. Sensex seems to have approved the move and gained more than 1900 points in a highest intra-day gain seen over the past few years.
Make in India push
In another change, the government has also decided to expand the scope of CSR 2 percent spending by also including funds spent on incubators funded by central or state government or any agency or public sector undertaking of central or state government, and, making contributions to public funded universities, IITs, national laboratories and specified autonomous bodies engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.
Further, with an extremely competitive corporate tax rate, combined with inherent factors such as skilled yet cheap labour, India could be on course to be the next manufacturing hub of the world, especially south-east Asia. We can also expect supply chains of global businesses to be structured through India thereby increasing investments in India.
The amendments surely are positive moves that should push for greenfield investments, greater economic activity, new employment opportunities and a renewed vigour for Make/ Manufacture in India. Above all, the changes are expected to go a long way to arrest the current slowdown and lift the overall market sentiment.
Raju Kumar is Tax Partner at EY India. The views expressed are personal.