In an effort to boost investment in the economy, the government on Friday lowered corporate tax effectively by 10 percentage points for existing companies and 12 basis points for new companies.
This is the fourth dose by the government to arrest the slowdown in the economy.
All together there are six amendments in the Income-Tax Act and Finance Bill 2019 which will cost ₹1.45 lakh crore on an annual basis. Now, an ordinance has been promulgated to make these changes effective Friday.
All the eligible companies will adjust the benefit in the next instalment of advance tax which is due on December 15. It is expected that the government will move amendments in these two Acts during winter session of Parliament.
Finance Minister Nirmala Sitharaman made it clear that the lower corporate tax rate of 15 per cent for new manufacturing companies incorporated after October 1 will have no sun set clause (it will be open ended).
When asked about the impact on the fiscal deficit, she said, “We want to have more investment in ‘Make in India’ and job creation. More economic activities will bring more revenues.” She also made it clear that she will take into cognisance all the numbers arising out of reduction in GDP growth rate and lower tax collection.
Corporate tax rate
Surprising everyone, the Finance Minister slashed the maximum corporate tax rate from 30 per cent to 22 per cent. As of now, tax rate for corporates having annual turnover less than ₹400 crore is 30 per cent, while for others it is 25 per cent.
In other words, 0.7 per cent corporate tax assesses pay tax rate at 30 per cent and remaining at lower rate. Now, for all of them, the total tax rate will be 22 per cent subject to the condition that they will not avail themselves of any exemption/incentive. The effective tax rate for these companies will be 25.17 per cent inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax (MAT).
Any domestic company incorporated on or after October 1, 2019 and making fresh investment in manufacturing can opt to pay 15 per cent tax - provided they, too, do not avail themselves of exemptions/incentives and commence production before March 31, 2023.
The effective tax rate for these companies will be 17.01 per cent including surcharge and cess. These companies too will not be required to pay MAT.
Sitharaman emphasised that there will not be any ‘sunset’ clause for these newer companies. This means they will continue to get the tax benefit till any new system is brought in. Also, any foreign entity that is starting manufacturing units will get the benefit of lower new tax.
A company that opts out of lower tax regime and avails itself of tax exemptions/incentives will continue to pay tax at the earlier rate. However, they can opt for the lower tax regime after their tax holiday/exemption period expires. Sitharaman made it clear that after the exercise of the option, they will be liable to pay 22 per cent tax, and the option, once exercised, cannot be withdrawn.
Benefit on capital gain
The Minister said the enhanced surcharge introduced in this Budget will not apply on capital gains arising on sale of equity shares in a company or a unit of an equity-oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, Hindu Undivided Family, Association of Persons, Body of Individual and Artificial Juridical Persons.
The enhanced surcharge will also not apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors. Also, listed companies that made a public announcement of a buyback before July 5, 2019 will pay no tax on the buyback.
Here are the amendments in Income Tax Act:
1. In order to promote growth and investment, a new provision has been inserted in the Income Tax Act with effect from FY 2019-20 which will allow any domestic company an option to pay income-tax at the rate of 22 per cent subject to condition that they will not avail any exemption/incentive. The effective tax rate for these companies shall be 25.17 per cent inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax (MAT).
2. In order to attract fresh investment in manufacturing and thereby provide boost to ‘Make-in-India’ initiative of the Government, another new provision has been inserted in the Income Tax Act with effect from FY 2019-20 which will allow any new domestic company incorporated on or after October 1, 2019 making fresh investment in manufacturing, an option to pay income tax at the rate of 15 per cent.
This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before March 31, 2023. The effective tax rate for these companies shall be 17.01 per cent inclusive of surcharge & cess. Also, such companies shall not be required to pay MAT.
3. A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period.
After the exercise of the option they shall be liable to pay tax at the rate of 22 per cent and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of MAT has been reduced from existing 18.5 per cent to 15 per cent.
4. In order to stabilise the flow of funds into the capital market, it is provided that enhanced surcharge introduced by the Finance (No.2) Act, 2019 shall not apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, HUF, AOP, BOI and AJP.
5.The enhanced surcharge shall also not apply to capital gains arising on sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs).
6. In order to provide relief to listed companies which have already made a public announcement of buy-back before 5 July 2019, it is provided that tax on buy-back of shares in case of such companies shall not be charged.
It has also been decided that to expand the scope of CSR 2 per cent spending. Now CSR 2 per cent fund can be spent on incubators funded by central or state government or any agency or Public Sector Undertaking of central or state government, and, making contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.