Recent Amendment in Corporate Tax rates made India attractive jurisdiction in Tax perspective

On 20 September 2019, the Government of India has introduced the Taxation Laws (Amendment) Ordinance, 2019 (‘the Ordinance’) which reduced the Corporate Tax Rates for domestic companies to 22% (15% in case of new manufacturing companies). It is a pertinent and immense step of Government of India to promote foreign investments and growth in Indian economy.

The reduced Corporate Tax rates has made India an attractive jurisdiction from tax perspective and competitive with other asian countries such as Hong Kong (16.5%), Singapore (15%), Thailand (20%), Vietnam (20%), Malaysia (24%), Indonesia (25%), China (25%), South Korea (25%) and Japan (30.62%).

This Ordinance will likely to boost foreign investment in India across the sectors. Below is the gist of newly inserted tax regime applicable to domestic companies in India:-

1. Domestic Company involved in Manufacturing Sector (Section 115BAB)
Currently, any company set up and registered on or after 1st March 2016 engaged solely in the business of manufacture or production of article or thing and do not claim specified benefits or deduction is taxable at the rate of 25%.

In order to boost the growth and investment in manufacturing sector, new Corporate Tax Rate of 15% (plus uniform surcharge of 10%) has been introduced, subject to the following conditions:

• The company is incorporated on or after 1st October’ 2019 and started the manufacturing on or before the 31st March’ 2023
• The company is not formed by splitting or reconstruction of business already in existence (exception provided under the Income Tax Act 1961)
• The Company does not use the plant and machinery previously used for any purpose and any building which was previously used as a convention centre or a hotel.
• The Company is not claiming any specified deductions and exemptions under Income Tax Act 1961. The specified deductions and exemptions are relating to SEZ; additional depreciation; investment in backward states; Tea / Coffee / rubber development, site restoration funds, expenditure on scientific research, agricultural extension, skill project etc
• Once the option is exercised for any previous year, it cannot be withdrawn for the same or any other previous year.

2. Any other domestic company opting not to claim specified deduction / exemption (Section 115BAA)
Currently, any company having turnover or gross receipt not exceeding INR 400 Crore in the financial year 2017-18 is taxable at 25% (other domestic companies are taxable at 30%).

In order to boost the growth and investment in India, the Government of India has introduced the new Corporate Tax Rate of 22% (plus uniform surcharge of 10%) applicable w.e.f. FY 2019-20, subject to the following conditions:

• The Company is not claiming any specified deductions and exemptions under Income Tax Act 1961. The specified deductions and exemptions are relating to SEZ; additional depreciation; investment in backward states; Tea / Coffee / rubber development, site restoration funds, expenditure on scientific research, agricultural extension, skill project etc
• Once the option is exercised for any previous year, it cannot be withdrawn for the same or any other previous year.

 

3. Any domestic Companies opting to claim specified deduction/ exemption
Any domestic Companies opting to claim specified deduction/ exemption shall be taxable as per current rate only as mentioned below:

Taxation	Present Rate Turnover up to INR 400 Crore (FY 2017-18) Turnover exceed INR 400 Crore (FY 2017-18)
Corporate Tax	25% 30%

* plus surcharge and cess

 

4. Amendment in Minimum Alternative Tax
The Ordinance reduced the Minimum Alternative Tax as 15% from 18.5% for the companies.

However, the companies exercising the option under sections 115BAA or 115BAB as stated above have been excluded from the applicability of Minimum Alternative Tax.

Further, the Government of India vide Circular No 29/2019 dated 2nd October’ 2019 has clarified that companies opted for reduced corporate tax rate are not eligible to claim brought forward credit of minimum alternative tax and loss on account of additional depreciation.

To summarize above:

• The company registered in India on or after 1st October’ 2019 and commenced the manufacturing on or before 31st March’ 2023 satisfying relevant conditions has an option to pay tax at 15% with no MAT.
• The company registered in India and satisfying the relevant conditions has an option to be pay tax at 22% with no MAT from financial year 2019-20 onwards.
• The company registered in India with turnover not exceeding INR 400 Crore during financial year 2017-18, Taxable at 25% ( i.e. not availing above option)
• The company registered in India with Turnover exceeding INR 400 Crore during financial year 2017-18, Taxable at 30% ( i.e. not availing above option)
• The Ordinance reduced the Minimum Alternative Tax as 15 percent from 18.5 percent.
• The Ordinance provided uniformity in surcharge rate of 10% on companies opting for Tax under Section 15BAA or 115BAB.

To conclude:-
With the reduction in Corporate Tax Rate to 22% and 15% (in case of manufacturing) with no minimum alternative tax:-

• Many foreign companies may consider India as Manufacturing or Trading hub for doing investment and business in Asian market
• Many foreign companies may consider setting up their subsidiary with legal structure of domestic company instead of Limited Liability Partnership (as reduced Corporate Tax Rate is not applicable to Limited Liability Partnerships)