Flat 10% surcharge for companies opting for the new corporate tax rate

BL Research Bureau

The amendments on Friday by Finance Minister Nirmala Sitharaman, brought in the much-awaited relief for domestic corporate taxpayers– a lower rate of 22 per cent and 15 per cent for new manufacturing companies. These rate cuts, however, came in with plenty of ‘conditions apply’ clauses.

Most evident one among them was that, under the new rates companies will not be able to claim certain deductions and exemptions. These include, deductions on accelerated depreciation and tax holiday provisions under Chapter VI-A.

What went unnoticed, was that the companies opting the new rates will also have to pay a surcharge of 10 per cent, irrespective of their total income. Hence, the effective tax rate for these companies comes to 25.17 per cent with surcharge, health and education cess, under all circumstances. For manufacturing companies incorporated after October 1 and eligible for rates under section 115BAB of the IT Act 1961 at 15 per cent, the effective rate comes to 17.16 per cent.

Whereas, for those continuing to avail the exemption and deductions, surcharge will be levied only if their total income exceeds ₹1 crore, as was the case earlier.

In the existing regime, domestic companies were charged income tax at 30 per cent (if the turnover in FY18 was less than ₹400 crore at 25 per cent). Upon this tax, surcharge was levied only if the total income of the company crossed ₹1 crore.

The rates of surcharge for those companies opting to pay tax at 30/25 per cent, will continue to be at 7 and 12 per cent, for total income in the range of rupees one crore to ten crore and more than ten crore respectively.

Indefinite option

One other important thing to note is that for companies that opt for the new tax rates, MAT provisions will not apply. While this might mean a tax saving on the face of it, certain companies will refrain from opting the new rates, until such time that they have MAT credit entitlement.

Similarly, a new manufacturing company, incorporated after October 1, would not opt for the lower tax rate if it can avail any other exemption or deductions. For instance, a new manufacturing company could be eligible for tax holiday benefits under Chapter VIA for setting up units at specified locations. Such a company would opt for lower tax rates only upon expiry of such tax holiday period.

This is because companies have the option to choose lower tax rates (both 15 and 22 per cent) in any assessment year after FY20. However, the option once availed cannot be withdrawn in any subsequent year.

For those who do not opt the new rates, MAT shall be levied at a revised rate of 15 per cent. Also, on the revised MAT rate of 15 per cent, existing surcharge levy of 7 and 12 per cent shall apply. Hence the effective tax rate (after surcharge and cess) under MAT would come to 15.6, 16.69 and 17.47 per cent for total income less than a crore, ₹1-10 crore and more than ₹10 crore respectively.

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