RSM outlines key amendments in India's corporate tax regime
Suresh Surana, the founder of RSM India, reflects on the changes in India’s corporate tax regime outlined in the Budget 2020 and the main implications for India-based companies.
The Government of India through Taxation Laws (Amendment) Ordinance 2019 (‘Taxation Ordinance’) made certain path breaking amendments in the Income-tax Act, 1961 (‘the Act’) in relation to taxation of domestic companies. The Union Budget 2020 has reiterated its commitment to continue this regime.
Corporate tax rate
As per the said Taxation Ordinance, the base corporate tax rate for certain domestic companies is reduced to 22% (plus applicable surcharge and education cess) and the effective tax rate is 25.17% provided the domestic companies will not avail specified deductions. Additionally, the companies opting for the lower tax regime would not be subject to MAT; in other words, MAT is not applicable in case of companies opting for lower corporate tax regime.
Fresh investments
The Taxation Ordinance also introduced special provision in order to attract fresh investment in manufacturing, which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%. This benefit is available to companies which do not avail any exemption / incentive and commences their production on or before 31st March, 2023. The effective tax rate for these companies shall be 17.16% inclusive of surcharge & cess. Also, such companies shall not be required to pay MAT. The Union Budget has extended this benefit to power generation companies.
The business of manufacture or production would not cover development of computer software in any form or in any media, mining, conversion of marble blocks or similar items into slabs, bottling of gas into cylinder, printing of books or production of cinematograph film or any other business as would be notified by the Central Government from time to time.
Book profit
The Taxation Ordinance also slashed the base tax rate on book profit under MAT provisions to 15% from 18.5% for all the domestic companies which prefer to continue taxation under pre – amended tax regime. The effective MAT rate in such case would be in the range of 17.47% to 21.55%.
Excluded from incentives
The domestic companies opting for lower corporate tax regime as mentioned above would not be able to claim incentive under the following sections of the Act:
- Section 10AA – deduction for exports by SEZ units
- Section 32(1)(iia) – additional depreciation allowance
- Section 32AD – deduction for investment in new plant and machinery in notified backward states
- Section 33AB – Tea/Coffee/ Rubber development allowance
- Section 33ABA – Site restoration fund
- Section 35AD – deduction in respect of specified business
- Section 35(1)(ii), (iia), (iii) and section 35(2AA), (2AB) – certain scientific research expenditure
- Section 35CCC – expenditure on agricultural extension project
Deduction under Part C of Chapter VIA as mentioned below other than section 80JJAA (deduction in respect of employment of new employees)
- specified infrastructure projects,
- telecommunication service providers,
- development of industrial park,
- power undertakings and undertakings for revival of power generating units,
- developer of SEZ,
- start-up undertaking,
- production of mineral oil and natural gas
- undertakings engaged in processing / preservation / transportation of specified food items
- affordable housing projects
- undertakings in special category states (Himachal Pradesh and Uttaranchal)
- undertakings in North Eastern States
- offshore banking unit in SEZ and International Financial Services Center
- deduction in respect of farm producer companies
Forward losses
The companies will also not be allowed to carry forward losses from earlier year, if such losses are attributable to any of the above mentioned deduction. It may be noted that the losses other than the losses attributable to the aforementioned deduction would be allowed to be carried forward and set off for future years.
MAT provisions
Whilst MAT provisions were not applicable to companies opting for lower tax regime, there was anomaly regarding allowability of carry forward of losses on account of additional depreciation and MAT credit of earlier years for set-off against the corporate tax liability in subsequent years. In this regards, the Central Board of Direct Taxes vide Circular No. 29/2019 dated 2nd October 2019 clarified that companies opting for section lower tax regime shall not be allowed to claim set off of any brought forward loss on account of additional depreciation and MAT credit shall also be not available.
The following table provides a comparative analysis of tax structure applicable to domestic companies:
Dividend Distribution Tax (DDT) provisions
Budget 2020 has done away with the provisions of section 115O, which provided for the dividend distribution tax (DDT) @ 20.55% from 1 April 2020 and onwards. The Indian companies shall need to withhold taxes on dividends paid to domestic and foreign shareholders as per the provisions of section 194 (@ 10%) and 195 (as per 115A @ 20% or treaty rate, as is beneficial) respectively. The Re-characterisation of “Dividend Distribution Tax” as “Dividend Withholding Tax (DWT)” for Non-Residents will enable foreign Shareholders to claim credit for such withholding tax under the Tax Treaty in their country of tax residence. This is a major step towards rationalisation of the foreign taxpayers.
Lower Withholding Tax on Foreign Currency Loans
The interest payment on Foreign Currency Loans (ECBs) are subject to concessional tax rate of 5% and is eligible for deduction subject to thin capitalisation rules.
