By Vikrant Rana and Rupin Chopra
The Taxation Laws (Amendment) Act, 2019, was initially introduced as an ordinance, which was promulgated in September, 2019. However, it was later developed into a Bill after making a few changes. On December 11, 2019, the Bill received the assent of the President and was enacted as ‘The Taxation Laws (Amendment) Act, 2019 (hereinafter referred to as ‘Act’). The Act collectively brings changes in the Income Tax Act, 1961 and The Finance Act (No. 2), 2019. The Act brings modifications in the existing payable tax rates for different companies. It sets out lower tax rates for companies that chose to opt out of certain tax deductions.
Key Highlights of the Act
- At present, domestic companies with an annual turnover up to Rs. 400 crore have to pay income tax at 25% and other companies have to pay income tax at 30%. Now, as per the Act, the companies will have an option to pay income tax at the rate of 22% if they do not claim certain applicable deductions mentioned under Chapter VI of the Income Tax Act, 1961.
- New domestic manufacturing companies can opt to pay tax at the rate of 15%, provided they do not claim certain applicable deductions. However, the companies choosing the 15% tax rate should be set up and registered after September, 2019 and should be able to start manufacturing before April 1, 2023.
- The Act also clarifies that certain businesses will not be considered as manufacturing businesses: computer software development, b. printing of books, c. production of cinematographic films, d. mining or any other business as notified by the government.
- The companies that opt for the revised rules will not be applicable to pay Minimum Alternate Tax (hereinafter referred to as ‘MAT’). MAT is the minimum amount of tax which is to be paid by a company in case when the normal tax liability falls below a certain limit, after claiming all deductions.
- MAT rates have been reduced from 18.5% to 15% for the companies not opting for the new tax rates, effective from Financial Year 2020-21.
- Domestic companies have to pay surcharge at 7% if the income is between Rs.1 crore to Rs. 10 crore and at the rate of 12% is the more than Rs. 10 crore. In this regard, companies opting for new tax rates have to pay surcharge at 10%.
- The Act further separates surcharge on capital gains from all other incomes. Surcharge on capital gains is classified as: a) 10% of tax on income between Rs. 50 lacs and Rs. 1 crore, b) 15% of tax on income between Rs. 1 crore and Rs. 2 crore, c) 25% of tax on income between Rs. 2 crore and Rs. 5 crore and 37% of tax on income above Rs. 5 crore.
- When the company generates income from buyback of shares, it is required to pay tax on 20% of the income so generated. Buyback of shares refers to a company purchasing its own shares.
With the introduction of relaxed rates for existing domestic companies and new manufacturing companies, India is set to take a leap in the ease of doing business. The option to either choose for the newly reduced rates or for the existing rates also gives an option to the domestic company to plan out the tax payment option accordingly to its best suited requirement. Inclusion of buyback and surcharge on capital gains further categorizes the tax structure. According to the quarterly filings (Q2 2019-2020) submitted by the BSE100 companies, the new rates have received a mixed response. Out of the 100 companies, 48 have opted for the new rates whereas 52 companies have not given a clear indication on adopting the new rates for 2019-2020.