Income Tax amendment - 2019 September

You have to go through tough situations to get better.

As a bold step to revive the current Indian economy, the Finance Minister announced various amendments in the form of reduced tax rate and incentives in the Income tax act. These changes have been done to lure the foreign investments and boost domestic business sentiments and consumer demand. The changes have been approved by the President through promulgation of Ordinance (Taxation Laws (Amendment) Ordinance 2019) under Article 123 of the Constitution of India. We discuss the changes in detail with possible impact:

Applicability:

The amendments would be applicable from the Previous Year 2019-2020 (Assessment Year 2020-2021).

Explanation of the amendments:

1. Existing Domestic Companies: Option of paying income tax at reduced base rate of twenty two percent (22%): - Section 115BA

Eligibility:

Domestic Company on exercising an irrevocable option of paying tax at reduced base rate of 22% - subject to condition that they will not avail the below mentioned deduction/exemptions.

Deductions/exemptions to be given up:

• deduction under section 10AA - Profits and Gains from newly established Units in Special Economic Zones (SEZ);
• additional depreciation on new plant and machinery (presently 20% rate) (Section 32)
• investment allowance of fifteen percent (15%) for setting up undertaking in notified backward areas (Section 32AD)
• deduction for tea/coffee/rubber development account (Section 33AB)
• deduction for site restoration fund (Section 33ABA)
• deduction in respect of expenditure on specified business - natural gas pipeline network, new hotel, new hospital, etc. (Section 35AD)
• deduction for weighted deduction of 150% on in-house research and contribution to National Laboratory or IIT or University for scientific research purpose(Section 35)
• Chapter VIA deduction (under heading 'C. Deductions in respect of certain incomes') other than deduction in respect of new employees (Section 80JJAA), which continues to be available. This would lead to exclusion of deduction under Sections - 80IA, 80IB, 80IC, 80IE, etc (infrastructure, backward states, etc related benefits)
• revised manner of computation of depreciation admissible (not yet notified)
• loss carried forward from earlier assessment years will have to be re-calculated ignoring the above deductions (a-i);

Timelines for exercising the option:

It has be exercised before due date of furnishing the returns of income for assessment year 2019-2020, i.e., 30 September 2020 or 30 November, as applicable. Once the option has been exercised, it cannot be subsequently withdrawn for the same or any future previous years.

Revised statutory tax rate applicable:

The Surcharge would be ten percent (10%) and Cess would be 4 percent (4%). This would give an effective statutory tax rate of 25.168 percent.

2. New Domestic Companies: Option of paying income tax at a further reduced base rate of fifteen percent (15%): - Section 115BAB

Eligibility:

• it must be set-up and registered on or after 1st October 2019;
• it must be engaged in manufacture or production of an article or thing and the manufacturing must be commenced on or before 31st March 2023;
• it is not formed by splitting up or reconstruction of business already in existence and at least 80 percent of its total value of plant and machinery must be new plant and machinery (simply put, it must be a NEW company);
• it does not use any building previously used as a hotel or a convention centre;
• Deductions/exemptions to be given up: These would be same as mentioned for an existing company above.
• Assessing Officer (AO) to check misuse of these provisions:

If the AO believes that the course of business between the assessee company and any other person is arranged in such a manner which results in the assesse company generating more than 'ordinary profits' that might be expected to arise from such business transactions, the AO can make necessary adjustments in the income tax calculations. The above can be due to 'close connection' between the assessee company and the other party.

Timelines for exercising the option:

 It has be exercised before due date of furnishing the returns of income for assessment year 2019-2020, i.e., 30 September 2020 or 30 November, as applicable. Once the option has been exercised, it cannot be subsequently withdrawn for the same or any future previous years.

Revised statutory tax rate applicable:

The Surcharge would be ten percent (10%) and Cess would be 4 percent (4%). This would give an effective statutory tax rate of 17.16 percent.

3. Changes in the Minimum Alternate Taxes (MAT):

• The base rate for MAT has been decreased from eighteen and one-half percent (18.50%) to fifteen percent (15%).
• The MAT will not be applicable to companies who have exercised the options of reduced income tax rate of 22 and 15 percent in SL No. 1 and 2 above respectively.

4. Tax on distributed income to shareholders on buy-back of shares removed:

• Currently, companies are required to pay tax @20% on the distributed income on buy-back of shares (differential between the consideration paid by the company on buy-back and the amount which was originally received by the company on issue of such shares).
• The amendment provides that the above tax will not be applicable for buy-back of listed shares, in respect of which public announcement has been made before 5th July 2019.

Can it be withdrawn?

• Yes - The amendment has to be laid before both Houses of Parliament and agreed by them. They may pass a Resolution disapproving the Ordinance so passed.
• Additionally, the President himself can withdraw the Ordinance any time.

Certain clarifications awaited or criticisms:

A. The manner of calculation of depreciation for entities opting for the concessional income tax rate under section 115 BA and 115 BAB will be prescribed separately.

B. The industry awaits further guidance as to the circumstances wherein Assessing Officer can conclude that the business transaction has produced 'more than ordinary profits which might be expected to arise'.

C. The amendment does not mention about the MAT tax credit brought forward from preceding assessment years as per Section 115JAA. Will this MAT credit brought forward, still be available for set off for companies opting for concessional tax rate as per Section 115BA and 115BAB?

D. The amendment takes away the below existing incentives provided for companies:

1. to invest in specified backward regions (Section 32AD investment allowance);
2. to carry on specified business (Section 35AD);
3. to carry out scientific research (Section 35);
4. to invest in new plant and machinery (Section 32 - additional depreciation);
5. Chapter VIA deductions for specific businesses: (Section 80 deductions);

Sudden change in the tax laws and bring all companies to level playing field by taking away these deductions/exemptions will create situation of uncertainty and unrest among the industry planners. There are enumerable projects undertaken by the corporates (complete/work-in-progress), to reap the benefits of tax cut incentives provided by the government. These projects may now no longer be viable or profitable, since there is no added incentives existing. The corporates may now decide to halt the current in-house research projects under the revised scenario.

Hence, it is believed that the government will come out with a separate incentive program to keep the abovementioned projects ongoing with complete enthuse.

E. The personal income tax rates remain unchanged. The base income tax rate for tax income exceeding Rs 10 lakhs continues at 30%. This does not compare favourably with the revised corporate tax rate of 22%. The government may soon have to revisit this anamoly and come out with a solution.

F. The existing tax provisions provide for concessional tax rate for certain specific class of income. Examples- Long term capital gains - 20%/10%; Dividend from foreign companies - 15%; The reduction in statutory base rate without corresponding reduction in the concessional tax rate for the specific classes of income, takes away the benefits/incentives associated with those class of income. The government will have to consider the impact of the same, since the corporate fund planning and investments will surely be impacted by this reduction in the benefits associated.

G. Quarterly financial results: By now, the listed companies would have disclosed their financial results for the quarter ended 30 June 2019 and would have considered 30% as the base income tax rate for necessary tax calculation and entries. All these companies would need to revise their income tax computation whilst computation of tax expense for the half year ended 30 September 2019. This would lead to tax credit relating to earlier quarter and necessary disclosures would have to be made in the financial results.

Additionally the opening deferred tax balances would now be required to be re-measured at the revised tax rate and this would also result in tax credit/debits relating to earlier years (depending upon whether the opening net deferred tax balance is a liability/asset.

Conclusion:

Tough times call for tough decisions.

This tax cut brings India tax rate closer to the tax rates of all the emerging economies in this part of the world. Added incentives for new manufacturing companies will drive positive vibes across the industry, encourage new investments and create job opportunities and thus help to increase the consumer demand, which is the need of the hour.

We hope that the government is able to tide through the above pitfalls discussed, and is able to meet its targeted objective. The government may need to come out with supplementary amendments and clarification to aid its big step forward. The corporates and society at large need to support and help the government in its bid to take the country forward. The reduction in tax rate by such a large margin, is certainly a bold step and would be a big impact in the fiscal deficit for the economy.