Union Finance Minister Nirmala Sitharaman while addressing the Press announced a slew of tax amendments in order to provide a filip to growth of the economy. The economic boosters in form of tax reforms were need of the hour in order to attract new investments and give impetus to the economy. The Government passed Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019.
Below are a few impact areas that the companies and investors will need to revaluate:
1. Concessional tax rate for domestic companies
Existing domestic Companies have two options to choose their manner of taxation:
a. Pay income tax at lower rate of ~25% if they do not avail exemption or incentives and the companies do not have to pay Minimum Alternate Tax (MAT).
With this change, the Government seems to be moving towards equalizing the corporate tax rate to the existing MAT rate of ~21%.
b. Alternatively, if the existing domestic companies continue to avail tax exemptions, then tax @ ~35%/29% would continue to apply. MAT will continue to apply, which is now reduced to 17.5% vis a vis earlier rate of 22%.
After the tax holiday period expires, companies shall pay tax @ ~25% and no MAT shall apply.
| Exemption/ incentive availed | Existing Rates | Proposed Rates | ||
| Normal Tax | MAT | Revised Normal Tax | MAT | |
| Not availed | ~35% / ~29% | ~22% | ~25% | Nil |
| Availed | ~35% / ~29% | ~22% | ~35% / ~29% | ~17.5% |
An impetus for companies that do not avail tax exemptions
This is a welcome move for the companies, whose turnover is more than INR 400 crores and do not claim substantial exemptions or deductions, thus reducing their tax rate from ~35% to ~25%. While, companies having turnover of less than INR 400 crores of turnover will have a marginal relief of 4%. This will ultimately increase the net disposable surplus available with the companies, which could be utilised in expansion of business.
Impact on IRR for investors where the companies are eligible for tax exemptions
For companies availing tax holiday/exemptions, it will be interesting to undertake a cost benefit analysis to understand what is more beneficial in terms of tax outflow over a period.
This is specifically applicable for infrastructure and manufacturing companies, which avail tax holiday period over a period or claim an accelerated deduction for capital-intensive expenditure. This will have an impact on cash flows and it will be important for investors in such companies to relook at the potential bearing on IRR.
Will MAT credit be available for set off ?
A point to note here would be the companies, which are in the midst of their tax holiday period and have paid taxes under MAT. A question would arise, whether such companies can set off accumulated MAT credit against future corporate tax rate of 25%. There is no specific mention on treatment of MAT credit in the Ordinance.
- One view is that, entire MAT credit should be available (equal to corporate tax paid for following years, since MAT would be zero). If MAT credit is available, it may result in a scenario, where the company does not pay any tax for a few years, which may result in effectively reducing the corporate tax rate below existing MAT of ~21%.
- While another view is that MAT credit will not be available as MAT provisions are not applicable. Moreover, the companies would anyways enjoy a reduced rate of 25%.
- A middle ground could be that MAT credit to the extent of difference between 25% and 17.5% should be available to bring it on par with other companies, which would pay a reduced MAT of 17.5%.
This change could have an impact on the projected cash flows for the companies who have factored in MAT credit in their financial model.
Reversal of deferred tax asset and liabilities (DTA/DTL)
Considering that historically, the companies would have recognised DTA and DTL at ~35% tax rate. If a company chooses to avail concessional tax rate of ~25%, the company may have to write-off DTA or write-on DTL for the difference of 10%. This may have an impact on the valuation of the company in case DTA/DTL is a high amount because of past years losses.
Interplay between LLP and company for promoter driven companies
It would be interesting to know how the promoter driven group companies would structure their operations in future. LLP structure may still be beneficial as no DDT is applicable at the time of distribution of income and enables ease in repatriation of funds to the investors. In addition, additional tax @10% on receipt of dividend from company adds to the tax cost in case of a company structure.
- Reduced tax rates for new manufacturing domestic companies
In a major boost to manufacturing sector, domestic companies incorporated on or after 1 October 2019 undertaking manufacturing activities will have an option to pay income tax at the rate of ~17%. This benefit is available to companies only if they do not avail certain incentives. Further, no MAT is payable. Transfer pricing will be applicable on transactions with persons having close connection.
- No enhanced surcharge on sale of certain securities
In order to stabilise flow of funds in the Indian capital market, enhanced surcharge of 25 percent and 37 percent will not apply to:
– Domestic investors: on capital gains arising on sale of equity shares of a company or units of equity oriented mutual fund or units of business trust liable for securities transaction tax.
– FPI: Capital gains arising on sale of any security, including derivatives.
However, enhanced surcharge rates shall continue to apply for other income.
- No tax on pre- July 5 buyback
In major relief to companies which were undergoing the process of buy back (viz. Infosys, Wipro), it has been announced that the buyback tax shall not be applicable to listed companies, which have already made a public announcement of buyback before 5 July 2019.
The Government has been pro-actively bringing in amendments in tax and regulatory framework and introducing slew of measures in order to bring back the economy on the path of growth. Today’s amendments have been lauded by the Corporate honchos and industry experts. However, it would be interesting to see how the Government tackles budget deficit and compensate for the loss of revenue of INR 1.45 lakh crore. Nevertheless, the Government has taken bold step to bring in tax reforms by way of Ordinance which will not only support domestic player but will also attract interest from various overseas jurisdiction enabling ambitious campaign of ‘Make in India’ promoted by Indian Government.
Author Bio
Do you think the Govememnt will have to suffer 1.45 trillion deficit from this? Because they mostly taken away all the deduction from companies.