Direct Tax Booster by the Indian Government

September 25, 2019
New Delhi

The Indian Government has come out with series of announcements in past few weeks to bring the economy back on the growth path. To further its initiatives to recharge the economy and also project itself as an attractive destination for investment before the global investors, last Friday (September 20, 2019), the Government came out with another booster with path-breaking changes in the headline Direct Tax Rate. Following the announcements, Government also issued an ordinance (Taxation Laws (Amendment) Ordinance, 2019) codifying the changes in the Direct Tax Law.

The announcements made by Finance Minister has been taken positively by investors as the Indian stock market rose 5.32% on Friday followed by a rise of 2.83% on Monday.

The announcements made by Finance Minister last week are below:

  • Headline corporate tax rate has been slashed from 25% to 22% (effective tax rate brought down from 29.12% to 25.17%) for all companies who do not wish to avail benefits under the Income Tax Act (the Act) such as tax holiday or accelerated depreciation or investment linked benefits or any other specified benefits under the Act. The companies can though take benefit under section 80JJAA (i.e., deduction on generating employment). This benefit of lower tax rate is available from current financial year (i.e. April 01, 2019 onwards).

  • To give boost to Make-in-India, the Government has announced a low headline corporate tax rate of 15% (effective tax rate brought down from 29.12% to 17.16%) for new companies in manufacturing sector set up on or after October 01, 2019 and commencing manufacturing by March 31, 2023. The benefit of reduced rate shall be subject to condition that Company should not avail any tax holiday or accelerated depreciation or investment linked benefits or any other specified benefits under the Income Tax Act. The companies can though take benefit under section 80JJAA (i.e., deduction on generating employment).

  • The companies opting for above concessional tax regimes will not be required to pay minimum alternate tax (MAT) @ 18.5% (plus surcharge and cess).

  • The companies opting for concessional tax regime cannot set off the losses generated on account of direct tax incentives / holidays which are not allowed in the concessional tax regime.

  • Where the Companies opt for above concessional tax regime, the same cannot be withdrawn subsequently.

  • A company which does not opt for the concessional tax regime and avails the tax exemptions/incentives, shall continue to pay tax at the current rates (i.e. 29.12% or 34.94%). However, these companies can opt for the concessional tax regime after the expiry of their tax holiday/exemption period. MAT rate for such companies also reduced from 18.5% to 15% (plus surcharge and cess).

  •  Finance Act 2019 introduced enhanced surcharge of 25% and 37% for higher tax paying individuals, Association of Persons, Artificial Juridical Persons and certain other taxable forms. Enhanced surcharge impacted Foreign Portfolio Investors (FPIs) who invest in India through non-corporate structures. Thus, to address the concern of FPIs and to stabilise the flow of funds into capital market, Indian Government has proposed to roll-back the enhanced surcharge applicable to such taxable forms on transfer of listed equity shares, listed units of equity-oriented funds and listed units of business trust.

  • Finance Act 2019 had brought repurchase of shares (buy-back of shares) made by listed companies within the ambit of tax. To provide relief to listed companies who had already announced buy-back before the Budget day, the Ordinance provides that no buy-back tax shall be charged on those listed entities who have already announced buyback before July 05, 2019.

In addition to the above tax announcements, the Government has also expanded the scope of Corporate Social Responsibility (CSR) spending. It has permitted CSR funds to be spent on:

⎯ Incubators funded by Central or State Government;

⎯ Any agency or Public Sector Undertaking of Central or State Government; and

⎯ Contributions to Public Funded Universities, IITs, National Laboratories and Autonomous Bodies engaged in conducting research in science, technology, engineering and medicine.

The announcements made by the Government have been well received by the investors. Further the above amendments have thrown up certain questions which should also be taken up by the Government swiftly.

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