Taxation Laws (Amendment) Ordinance 2019 – Income Tax Amendment – 2019 September
You have to go through tough situations to get better.
As a bold step to revive the current Indian economy, the Finance Minister announced various amendments in the form of reduced tax rate and incentives in the Income tax act. These changes have been done to lure the foreign investments and boost domestic business sentiments and consumer demand. The changes have been approved by the President through promulgation of Ordinance (Taxation Laws (Amendment) Ordinance 2019) under Article 123 of the Constitution of India. We discuss the changes in detail with possible impact:
The amendments would be applicable from the Previous Year 2019-2020 (Assessment Year 2020-2021).
Explanation of the amendments:
Domestic Company on exercising an irrevocable option of paying tax at reduced base rate of 22% – subject to condition that they will not avail the below mentioned deduction/exemptions.
a) deduction under section 10AA – Profits and Gains from newly established Units in Special Economic Zones (SEZ);
b) additional depreciation on new plant and machinery (presently 20% rate) (Section 32)
c) investment allowance of fifteen percent (15%) for setting up undertaking in notified backward areas (Section 32AD)
d) deduction for tea/coffee/rubber development account (Section 33AB)
e) deduction for site restoration fund (Section 33ABA)
f) deduction in respect of expenditure on specified business – natural gas pipeline network, new hotel, new hospital, etc. (Section 35AD)
g) deduction for weighted deduction of 150% on in-house research and contribution to National Laboratory or IIT or University for scientific research purpose(Section 35)
h) Chapter VIA deduction (under heading “C. Deductions in respect of certain incomes”) other than deduction in respect of new employees (Section 80JJAA), which continues to be available. This would lead to exclusion of deduction under Sections – 80IA, 80IB, 80IC, 80IE, etc (infrastructure, backward states, etc related benefits)
i) revised manner of computation of depreciation admissible (not yet notified)
j) loss carried forward from earlier assessment years will have to be re-calculated ignoring the above deductions (a-i);
It has be exercised before due date of furnishing the returns of income for assessment year 2019-2020, i.e., 30 September 2020 or 30 November, as applicable. Once the option has been exercised, it cannot be subsequently withdrawn for the same or any future previous years.
The Surcharge would be ten percent (10%) and Cess would be 4 percent (4%). This would give an effective statutory tax rate of 25.168 percent.
a) The base rate for MAT has been decreased from eighteen and one-half percent (18.50%) to fifteen percent (15%).
b) The MAT will not be applicable to companies who have exercised the options of reduced income tax rate of 22 and 15 percent in SL No. 1 and 2 above respectively.
Can it be withdrawn?
Certain clarifications awaited or criticisms:
A. The manner of calculation of depreciation for entities opting for the concessional income tax rate under section 115 BA and 115 BAB will be prescribed separately.
B. The industry awaits further guidance as to the circumstances wherein Assessing Officer can conclude that the business transaction has produced “more than ordinary profits which might be expected to arise”.
C. The amendment does not mention about the MAT tax credit brought forward from preceding assessment years as per Section 115JAA. Will this MAT credit brought forward, still be available for set off for companies opting for concessional tax rate as per Section 115BA and 115BAB?
D. The amendment takes away the below existing incentives provided for companies:
a. to invest in specified backward regions (Section 32AD investment allowance);
b. to carry on specified business (Section 35AD);
c. to carry out scientific research (Section 35);
d. to invest in new plant and machinery (Section 32 – additional depreciation);
e. Chapter VIA deductions for specific businesses: (Section 80 deductions);
Sudden change in the tax laws and bring all companies to level playing field by taking away these deductions/exemptions will create situation of uncertainty and unrest among the industry planners. There are enumerable projects undertaken by the corporates (complete/work-in-progress), to reap the benefits of tax cut incentives provided by the government. These projects may now no longer be viable or profitable, since there is no added incentives existing. The corporates may now decide to halt the current in-house research projects under the revised scenario.
Hence, it is believed that the government will come out with a separate incentive program to keep the above mentioned projects ongoing with complete enthuse.
E. The personal income tax rates remain unchanged. The base income tax rate for tax income exceeding Rs 10 lakhs continues at 30%. This does not compare favourably with the revised corporate tax rate of 22%. The government may soon have to revisit this anamoly and come out with a solution.
F. The existing tax provisions provide for concessional tax rate for certain specific class of income. Examples- Long term capital gains – 20%/10%; Dividend from foreign companies – 15%; The reduction in statutory base rate without corresponding reduction in the concessional tax rate for the specific classes of income, takes away the benefits/incentives associated with those class of income. The government will have to consider the impact of the same, since the corporate fund planning and investments will surely be impacted by this reduction in the benefits associated.
G. Quarterly financial results: By now, the listed companies would have disclosed their financial results for the quarter ended 30 June 2019 and would have considered 30% as the base income tax rate for necessary tax calculation and entries. All these companies would need to revise their income tax computation whilst computation of tax expense for the half year ended 30 September 2019. This would lead to tax credit relating to earlier quarter and necessary disclosures would have to be made in the financial results.
Additionally the opening deferred tax balances would now be required to be re-measured at the revised tax rate and this would also result in tax credit/debits relating to earlier years (depending upon whether the opening net deferred tax balance is a liability/asset.
Tough times call for tough decisions.
This tax cut brings India tax rate closer to the tax rates of all the emerging economies in this part of the world. Added incentives for new manufacturing companies will drive positive vibes across the industry, encourage new investments and create job opportunities and thus help to increase the consumer demand, which is the need of the hour.
We hope that the government is able to tide through the above pitfalls discussed, and is able to meet its targeted objective. The government may need to come out with supplementary amendments and clarification to aid its big step forward. The corporates and society at large need to support and help the government in its bid to take the country forward. The reduction in tax rate by such a large margin, is certainly a bold step and would be a big impact in the fiscal deficit for the economy.