Taxation Laws (Amendment) - Ordinance 2019

Tax on income of certain domestic manufacturing companies.

[Amendment in Section 115BA]

- The heading of Section 115BA has been amended to clarify its applicability to domestic manufacturing companies. The word "Manufacturing" was not there earlier.

- Section 115BA(1) has been amended and states that it is subject to the provisions of Chapter XII, other than those mentioned under section 115BAA and section 115BAB of the Income-tax Act, 1961 (the Act).

- Further, a new proviso has been inserted to section 115BA(4), which stipulates that in case the assessee exercises the option under section 115BAB, the benefit of section 115BA would be withdrawn.

VTPA Comments

- Section 115BAB(1) clearly provides that to avail the option of lower rate of tax of 15%, the domestic company must fulfill the provisions of section 115BAB(2)(a), which states that only companies set up and registered on or after 01 October 2019….. are eligible for the said benefit.

- Thus, in which manner, the company covered under section 115BA can avail of the benefit of the new section 115BAB, needs to be clarified.

- The question is whether the intention of the legislature was that the domestic manufacturing companies presently availing benefit of section 115BA, cannot avail benefit under section 115BAB.

- Considering the reason for the ordinance, namely, to give fillip to the economy, such intention would be a disincentive to the manufacturing sector, and will create two classes of manufacturing companies.

Tax on income of certain domestic companies

[Insertion of new Section 115BAA]

- Section 115BAA prescribes that the tax rate of the domestic company shall at its option, and apart from the provisions of section 115BAB and section 115BA, be computed at the rate of 22%. The concessional rate of tax of 22% is subject to fulfilment of certain conditions:

- Deductions as well as loss under sections 10AA, 32(1)(iia), 32AD, 33AB, 33ABA or sub-clauses (ii) or sub-clause (iia) or subclause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading of "Deductions in respect of certain incomes" other than the provisions of section 80JJAA.

- Depreciation under section 32 would be allowed as may be prescribed.

- The assessee should file his return of income before the due date prescribed under section 139(1).

- The option, once exercised cannot be withdrawn and would be applicable for subsequent years also.

VTPA Comments

- The amendment does not give clarity in which case a company covered under section 115BA can opt for being covered under section 115BAA.

- Proviso to section 115BA(4) clearly states that Provided that "once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year."

- Thus, in which manner, the company covered under section 115BA can avail of the benefit of the new section 115BAA needs to be clarified.

- This so, as the amendment by the ordinance, to section 115BA(4) by way of inserting a new proviso, as discussed above, does not cover section 115BAA.

Tax on income of certain new domestic manufacturing companies

- Section 115BAB prescribes that the tax rate of the domestic company shall at its option, and apart from the provisions of section 115BAA and section 115BA, shall be computed at the rate of 15%. The concessional rate of tax of 15% is subject to fulfilment of certain conditions:

- The company is formed or set up on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023.

[Insertion of new Section 115BAB]

- It is not formed by splitting up, or the reconstruction, of a business already in existence subject to exceptions. It does not use any machinery or plant previously used for any purpose. It does not use any building previously used as a hotel or a convention centre, as the case may be.

- The company is not engaged in any business other than 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.

- Deductions as well as loss under sections 10AA, 32(1)(iia), 32AD, 33AB, 33ABA or sub-clauses (ii) or sub-clause (iia) or subclause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading of "Deductions in respect of certain incomes" other than the provisions of section 80JJAA.

- Depreciation under section 32 would be allowed as may be prescribed.

- The ordinance also provides that where it appears to the Assessing Officer that, owing to the close connection between the company and any other person, course of business between them is so arranged that the business transacted between them produces to the company more than the ordinary profits which might be expected to arise, the computation shall take the amount of profits as may be reasonably deemed to have been derived therefrom.

- However, in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the same would be computed accordingly.

- The assessee should file his return of income before the due date prescribed under section 139(1) and the option, once exercised, cannot be withdrawn and would be applicable for subsequent years also.

Definition of ‘specified domestic transaction’

[Section 92(BA)(va)]

- Section 92BA has been made applicable to transactions between persons referred to in section 115BAB(4). The amendment has been brought about by introducing a new sub-section (va) to section 92BA.

- The amendment is as under:

"any business transacted between the persons referred to in subsection (4) of section 115BAB."

- The aggregate of the transactions mentioned under section 92BA of the Act entered into by the assessee exceed INR twenty crores.

VTPA Comments

- The amendment tends to equate availing tax holiday with domestic manufacturing companies availing lower rate of tax of 15%.

Special provision for payment of tax by certain companies

[Amendment to Section 115JB]

- Section 115JB(1) has been amended to provide that for the words "eighteen and one-half per cent", occurring at both the places, the words "fifteen per cent" are substituted. Thus, the rate of tax applicable under the MAT provisions has been reduced to 15%.

- Further, a new clause has been added to 115JB(5A), as per which a person who has exercised the option referred to under section 115BAA or section 115BAB would not be liable for MAT under section 115JB.

VTPA Comments

- One needs to look into whether the MAT credit brought forward from earlier years shall be allowed to be set off against regular tax liability of the companies availing concessional tax regime under section 115BAA or section 115BAB of the Act.

Tax on distributed income to shareholders

[Amendment to Section 115QA]

- Section 115QA(1) was amended to provide that a domestic company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income on buy-back of shares including those listed on a recognized stock exchange from a shareholder.

- The said amendment was to take effect from 5 July, 2019.

- The Ordinance has inserted a proviso to exempt buyback of shares listed on recognized stock exchange in respect of which a public announcement regarding the buyback has been made before 5 July, 2019 in accordance with the SEBI regulations.

VTPA Comments

- The aforesaid amendment clarifies that section 115QA will not apply to the companies who had already announced the buyback on the basis of the erstwhile provisions of the Act.

Existing*

Amended**

Income (INR)

Rate (%) @

Income (INR)

Rate (%) @

0 - 2,50,000#

Nil

0 - 2,50,000#

Nil

2,50,001 - 5,00,000#

5

2,50,001 - 5,00,000#

5

5,00,001 - 10,00,000

20

5,00,001 - 10,00,000

20

10,00,001 and above

30

10,00,001 and above

30

Existing

Amended

Total Income (INR)

Surcharge (%)

Total Income (INR)

Surcharge (%)

5 million - 10 million

10

5 million - 10 million

10

10 million - 20 million

15

Above 10 million

15

20 million - 50 million

25*

Above 50 million

37*

Description

Existing Rate (%)

Amended Rate (%)

Having Income from INR 10 million to 100 million

Having Income more than INR 100 million

Having Income from INR 10 million to 100 million

Having Income more than INR 100 million

(Including Health and Education Cess @ 4%)

A) Domestic company

Regular tax (Turnover <

2500 mn)

27.82*

29.12**

27.82*

29.12**

Regular tax

(2500 mn < Turnover < 4000 mn)

33.384*

34.944**

27.82*

29.12**

Regular tax

(Turnover > 4000 mn)

33.38*

34.94**

33.38*

34.94**

115BAB

NA

17.16***

17.16***

115BAA

NA

25.17***

25.17***

MAT

20.587

(of book profits)*

21.545

(of book profits)**

16.69

(of book profits)*

17.47

(of book profits)**

DDT

17.472**

17.472**

Dividend Received from Foreign subsidiary company

17.472**

17.472**

B) Foreign company

Regular tax

42.432$

43.68#

42.432$

43.68#

C) Firm and LLP

Regular tax

34.944

34.944

Alternate Minimum Tax  (AMT)

20.587

20.587