Government has brought in the Taxation Laws (Amendment) Ordinance, 2019 and announces major relief in corporate tax for domestic companies, in order to boost the Make in India initiative.

Corporate tax reduced to 22% (Effective Tax Rate 25.17% inclusive of Surcharge and Cess) for domestic companies while for new manufacturing companies, tax rate has been brought down to 15% (Effective Tax Rate 17.01% inclusive of Surcharge and Cess).

Further Minimum alternate Tax Rate been reduced to 15% from 18.5% for Company availing exemptions.

This article discusses Impact of recent changes on Tax rate and MAT and analyse the best choice between option of going with the pre-amended tax structure or switching to the newly inserted tax provisions.

Situation 1 – When the company is paying MAT tax u/s 115JB – in this case, it would be advisable to continue with the pre-amended tax structure as effective tax outflow would be 15% only (plus applicable surcharge and cess) and same will also lead to MAT Credit entitlement for future years.

Situation 2 – When the company is falling under normal taxation but having brought forward MAT credit – in this case also, it would be advisable to continue with the pre-amended tax structure as company can get the credit of MAT tax paid earlier and the Effective Tax Rate (ETR) would be 15% only (plus applicable surcharge and cess).

Situation 3 – When the company is neither in MAT nor having MAT Credit available with it and the ETR is LESS than 25.17% (i.e. the tax rate as per new options) – in this case also, it would be advisable to continue with the pre-amended tax structure as anything below ETR of 25.17% would be tax savings to such companies.

Situation 4 – When the company is neither in MAT nor having MAT Credit available with it and the ETR is MORE than 25.17% (i.e. the tax rate as per new options) – in this case, it would be advisable to exercise the one-time option of switching to new amended tax structure of 25.17% as there would be tax savings to such companies as under: –

Analysis of Savings in Tax Rates, if option u/s 115BAA if exercised
Income Slabs Pre-Amendment Scenario Tax Rate as per New option given u/s 115BAA Savings in Tax Rates
Companies having turnover Below Rs 400 cr Companies having turnover of Rs 400 cr or more Companies having turnover Below Rs 400 cr Companies having turnover of Rs 400 cr or more
total income upto Rs 1 Crore 26.00% 31.20% 25.17% 0.83% 6.03%
total income exceeding Rs 1 Crore but not exceeding Rs 10 crore 27.82% 33.38% 25.17% 2.65% 8.21%
total income exceeding Rs 10 crore 29.12% 34.94% 25.17% 3.95% 9.77%
Above rates are including of Applicable Surcharge and Cess’s

Situation 5 – New Manufacturing Companies incorporated after 01/10/2019 – it would be advisable to exercise the one-time option of switching to new amended tax structure of 17.16% as there would be tax savings.

Clearing air on brought forward MAT credit – The new tax structure of reduced tax rates is at the option of the Company to be exercised only once, it has its own benefits as well as compromises. Therefore, the company has to carefully select such option.

If the company chooses for the reduced tax rates u/s 115BAA, then the brought forward credit may not be available because of the following reasons: –

  • When the MAT is not applicable to such companies, then the computation mechanism for calculating MAT credit for such companies fails. As per Section 115JAA MAT credit is allowed to the extent of difference between tax on total income and tax which would have been payable under the MAT. Now, under new option the companies cannot work out such difference.
  • Under the new tax structure, by reducing the tax rates the Government is concerned with the net ETR of 25.17% and for that all the incentives have been withdrawn. This can also be inferred from the ‘Notwithstanding clause at the starting of Section 115BAA of the Act’.
  • The vested right of the Company as far as MAT credit is concerned, if not mandatory snatched away rather such credit would lapse only if the Company exercises the options of reduced tax rates.

Therefore, if the option is exercised by the corporates after due analysis, then the legal entitlement of brought forward MAT Credit can be fully enjoyed till it exhausts. But such MAT Credit Entitlement may lapse, if company hurriedly select the option of reduced tax rates without proper analysis.

CA Sunil MALOO – smaloo@sunilmaloo.com

Disclaimer: ‐ This document is intended for private circulation & knowledge sharing purpose only. All efforts have been made to ensure the accuracy of information in this document, however we will not be responsible for any errors that may have crept in inadvertently and do not accept any liability whatsoever, for any direct or consequential loss howsoever arising from any use of this document. The document shall not be construed as professional advice or an opinion.

Also Read relevant Press Releases and Notifications

Taxation Laws (Amendment) Ordinance, 2019

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2 Comments

  1. CA Aaditya Dastane says:

    Sir, as per my understanding, MAT is not applicable for companies opting sec 115BAA and 115BAB. Kindly confirm since in your article it has been mentioned that MAT is applicable for such Companies.

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