Addressing fourth press conference to revive the economy, Finance Minister Nirmala Sitharaman announced a slew of measures with an aim to boost the corporate sector and regain growth momentum. The summary of the announcements made by FM are as under:-
- Reduction in corporate tax rates for domestic companies:
a) Introduction of Section 115BAA* – Tax rates for all domestic companies have been reduced to 22% (effective rate 25.17%, including surcharge of 10% and cess of 4%), subject to condition that no tax holidays/ incentives/ exemption** are availed. In addition, such companies would not be required to pay Minimum Alternative Tax (MAT).
b) Introduction of section 115BAB – Domestic manufacturing companies (including Indian companies with foreign direct investment) incorporated on or after 1st October 2019 shall be required to pay corporate tax @ 15%, (effective rate 17.16% including surcharge and cess)***. This is subject to the condition that no tax exemption/ incentive** is availed and company commences production before 31st March, 2023. Further, such companies shall not be required to pay MAT.
- The proposed reduction of tax rate to 25.17% (as against the peak 34.944%) an effective tax rate reduction of almost 10%. This is a significant benefit for the industry as major players in IT-BPM industry are above INR 400 crore threshold for applicability of 25% corporate tax rate^.
- Further, for companies that were entitled to the earlier reduced basic corporate tax rate of 25% (effective tax rate of 29.12%), the reduction is 3.95%.
- For IT companies incorporated after October 1, 2019 proposing fresh investments in the hardware/fab sector (commencing manufacture before March 31, 2023), they may be benefitted by the new incentivized corporate tax rate of 17.01%.
- NASSCOM had raised its voice advocating for reduction of tax rates for all companies in all meeting with the government officials and media articles. The issue was also highlighted in our analysis of Union Budget 2019. NASSCOM’s blogpost can be accessed from the below pasted link: https://community.nasscom.in/communities/policy-advocacy/highlights-of-union-budget-2019.html
2. Tax rate for companies enjoying the benefit of tax holiday/ exemption period:
a) Companies not opting for concessional tax regime and availing tax exemption/incentive** shall continue to pay tax at pre-amended rate. In order to provide relief to such companies, rate of MAT has been reduced from existing 18.5% to 15% (i.e, effective MAT reduction of ~4.076% after considering surcharge and cess).
b) However, such companies can opt for the concessional tax regime (i.e. 22% tax rate) after expiry of tax holiday/exemption period. Option once exercised cannot be subsequently withdrawn.
- IT/ITES companies that have come out of their SEZ tax holidays (section 10AA) are entitled to opt for the new corporate tax rate of 25.17% under section 115BAA. However, it is not clear at this stage if such companies will be allowed to use their brought forward MAT credits. A suitable clarification may have to be issued by the Government on this.
- While the press release is silent on extension of sunset clause for Special Economic Zones under section 10AA of the Income Tax Act, 1961, companies claiming tax holidays, whose Effective Tax Rate (“ETR”) (after claiming tax holidays) is higher than the peak 25.17% can now choose to give up the tax holiday claims and claim the new tax rate of 25.17%.
- Companies having ETR of less than 25.17% (after claiming tax holidays) can continue to pay at the effective lesser ETR.
- Companies continuing to claim tax holidays and not opting for the switch will have to pay at reduced rate of 17.47% (as against the earlier 21.55%). This will also help in reducing the cash tax outflow on account of MAT.
- NASSCOM has, in pre-budget memorandum submitted to the Ministry of Finance, advocated for reduction in tax rates while phasing out incentives holistically. Our detailed pre-budget memorandum can be accessed from the link pasted: https://community.nasscom.in/communities/policy-advocacy/nasscoms-direct-tax-proposals-for-union-budget-2019-and-consolidated-suggestions-related-to-gst.html
Based on the above two announcement, summary of applicability of corporate tax* and MAT rate is provided below:
|Particulars||Current corporate tax rate||Proposed corporate tax rate||Current MAT rate||Proposed MAT rate|
|Companies opting to continue with the existing tax holiday/ exemption||34.944%/ 29.12%||34.944%/ 29.12%||21.55%||17.47%|
|Companies opting for concessional tax rate – under section 115BAA)||34.944%/ 29.12%||25.17%||21.55%||NIL|
|Companies engaged in manufacture (incorporated after October 1, 2019) – under Section 115BAB||34.944%||17.16%||21.55%||NIL|
(All rates are inclusive of surcharge and cess)
3. Buy-back tax:
The Budget 2019 announcement of expanding the scope of buy-back tax to include buybacks by listed companies has been grandfathered to the extent of shares of such listed companies which have already made a public announcement of buyback before July 5, 2019. Such shares would not be subjected to the buy back tax.
- NASSCOM had made a detailed submission to Ministry of Finance in July 2019 requesting for clarity on the applicability of buy-back tax.
- This is a welcome clarification and will bring relief for the industry and specifically to companies that had announced buy-back without factoring the buy-back tax
4. Amendment in Schedule VII of Companies Act, 2013
Scope of Corporate Social Responsibility (CSR) has been expanded to include spending on:
a) Incubators funded by Central/State Government/ 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 Sustainable Development Goals (SDGs).
- This move is likely to provide access of funding to incubators, thereby providing a boost to the Startup ecosystem.
- NASSCOM had submitted its feedback to the High Level Committee on Corporate Social Responsibility-2018 (HLC-2018) formulated by Ministry of Corporate Affairs (MCA) wherein we had advocated for expanding the applicability of CSR to all incubators. Our detailed submission to Ministry of Corporate Affairs can be accessed from the following link:https://community.nasscom.in/communities/policy-advocacy/nasscom-suggestions-on-corporate-social-responsibility-csr-provisions-in-companies-act-2013.html
5. Other measures:
- Enhanced surcharge introduced in Budget of July 2019 will not apply on capital gains arising on sale of equity shares in a company or a unit of an equity oriented fund liable for securities transaction tax
- Enhanced surcharge will not apply on capital gain arising from sale of secutrity / derative in the hands of Foreign Portfolio investors (FPI)
Overall, the government has taken bold and proactive steps to bring the much-needed tax reforms which will boost investment and make Indian companies globally competitive.
Copy of the press release and Taxation Laws (Ordinance), 2019 are attached for your reference.
We will keep you posted on any further developments in this regard.
**Refer attached document for the list of tax holidays/deductions/exemptions
***There is a discrepancy in computation of effective rate as stated in the press release at 17.01
^Announced by Finance Act 2019 in July 2019