On 20 September 2019, the president of India, Ram Nath Kovind, promulgated the Taxation Laws (Amendment) Ordinance, 2019, to introduce several major reforms to the direct tax framework, with the objective of rationalizing tax rates and reviving the slowing economy. Key reforms introduced by the ordinance are discussed below.
Reduction in corporate tax rates
Prior to the ordinance, domestic companies were subject to corporate tax at a headline rate of 30% (exclusive of surcharge and excess), although a lower rate of 25% was extended to companies whose total turnover or gross receipts did not exceed ₹4 billion (US$56 million) during the 2017-18 financial year. This lower rate was also applicable to domestic companies engaged in the business of manufacture or production of any article or thing, and research or distribution of such article or thing (manufacturing companies), which had been set up and registered on or after 1 March 2016, if such companies opted to be taxed at such a lower rate, subject to certain conditions prescribed under the Income Tax Act, 1961.
The ordinance has reduced the headline corporate tax rate for domestic companies from 30% to 22%, and from 25% to 15% for new manufacturing companies set up and registered on or after 1 October 2019. To this end, the ordinance introduces two new provisions into the IT Act: section 115BAA, applicable to domestic companies; and section 115BAB, applicable to new manufacturing companies.
The ordinance provides domestic companies with the option to be taxed at the lower rate instead of the regular rate of 30%, provided inter alia that their total income is computed without claiming certain specified deductions and exemptions, and they do not set off any carried forward losses from earlier assessment years, if such losses are attributable to the specified deductions and exemptions. If exercised, the option applies from the year of exercise and is irreversible going forward.
The ordinance also seeks to reduce the surcharge applicable on domestic companies who have opted to be taxed under sections 115BAA or 115BAB of the IT Act. Currently, the applicable rate of surcharge on domestic companies is 7% where total income exceeds ₹10 million but is less than ₹100 million, and 12% where total income exceeds ₹10 million. The ordinance seeks to provide for a uniform surcharge rate of 10% for all domestic companies that opt for taxability under sections 115BAA and 115BAB of the IT Act.
Rollback of enhanced surcharge
In her budget speech earlier this year, Finance Minister Nirmala Sitharaman had announced an increase in surcharge by 3% and 7%, on individuals having taxable income between ₹20 million and ₹50 million, and ₹50 million and above, respectively. Eventually, the Finance Act, 2019, provided that the enhanced surcharge shall be applicable not only to individuals, but also to Hindu undivided families (HUFs), associations of persons (AOPs), a body of individuals (BOIs) and other artificial juridical persons. This resulted in foreign portfolio investors (FPIs), who were set up as trusts and category III alternative investment funds (AIFs), also coming within the purview of the enhanced surcharge, which adversely impacted investments into Indian capital markets.
The ordinance has withdrawn this higher surcharge to the extent applicable to long-term and short-term capital gains tax on listed equity shares, listed units of an equity-oriented funds, and listed units of a business trust. In respect of FPIs, the enhanced surcharge shall not be applicable on any tax payable on long-term and short-term capital gains, on transfer of any securities.
Reduction in minimum alternate tax (MAT)
Section 115JB of the IT Act is a special provision for payment of tax in cases where the income tax payable by a company on the total income computed, as per the provisions of the IT Act, is less than 18.5% of its book profit. In such cases, the book profit is deemed to be the total income of the company and is subject to tax at the rate of 18.5%. The ordinance has amended the threshold for applicability of the MAT by reducing the trigger point, from 18.5% to 15% of book profits. The ordinance has also correspondingly reduced the MAT rate, from 18.5% to 15%. Importantly, the ordinance also provides that the MAT will not be applicable in case of companies opting to be taxed under the newly introduced sections 115BAA and 115BAB of the act.
Withdrawal of buy-back taxes on listed shares
Section 115QA of the IT Act imposes a 20% tax on any income distributed by a domestic company to its shareholders on buy-back of shares. While this section was originally applicable only to buy-backs undertaken by unlisted companies, the Finance Act, 2019, expanded its scope to listed companies as well. The ordinance seeks to partially roll back the effect of the Finance Act, 2019, by providing that section 115QA shall not be applicable on a buy-back of shares by listed companies that had made a public announcement of buy-back prior to 5 July 2019 (i.e., prior to the passage of the Finance Act, 2019).
The business law digest is compiled by Nishith Desai Associates, a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. The firm specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.