Analysis of tax implication on ‘The Taxation Laws (Amendment) Ordinance, 2019 dated 20th September, 2019

The CBDT has introduced new section , Sec. 115BAA – Tax on income of certain domestic companies where at the option of the assessee, may compute tax @ 22% plus surcharge and cess (effective tax rate comes to 25.17%) from the financial year 2019-20 in place of existing effective tax rate 34.944% provided assessee satisfies following conditions as mentioned in sub section 2.

Important conditions to be satisfied as below –

a) The total income to be computed without taking incentive benefits like additional depreciation U/s 32(1)(iia), weighted deduction of R & D U/s 35(2AB) and Chapter VI-A deduction from Gross Total income like donation U/s 80G (other than 80JJAA benefit on employment);

b) The total income to be computed without set off of any loss carried forward from any earlier assessment year if such loss is attributable any of the deduction as referred in clause (a) above.

c) The total income is to be computed by claiming the normal depreciation U/s 32(1)(ii) as may be prescribed. We hope that , CBDT may come out new depreciation rate for the assessee who may exercise this option;

d) The loss referred in clause (b) shall be deemed to have been allowed and no further loss shall be allowed in the subsequent year.

e) The MAT provision is not applicable.

f) This option is to be exercised at the time of filing of Return of Income on or before due date as prescribed U/s 139 (1) of the Act from the FY 2019-20. Once this option exercised, it will be applicable to subsequent year and can not be withdrawn. This option can be exercised any time by the assessee ie no need to exercise in FT 2019-20 itself.

Effect on tax on moving from tax rate of 34.944% to 25.17% from IEL point of view.

(figure in crore)

FY 2017-18 FY 2018-19
Sr no. Particular Tax computa-tion as per existing  provision Tax computa-tion as per new provision Impact Tax comput-ation as per old provision Tax comput-ation as per new provision Impact
(a) (b) (c ) (d) (e) = (c-d) (f) (g) (h) = (f-g)
(i) PBT 1000 1000 1200 1200
(ii) Taxable profit 800 920 900 990 8,79
(iii) Tax Thereon 280 232 48 315 249 66
(iv) = (iii)/(i) ETR 28% 23.20% 26.25% 21.17%
Breakup of Impact On account of R &  D & Other incentive On account of incremental tax saving from 34.944% to 25.17% Breakup of Impact On account of R &  D & Other incentive On account of incremental tax saving from 34.944% to 25.17%
Net impact (d-c) 42 90 48 32 96 66

From the above figures, it shows that it is advantage position to move from existing tax rate to new tax rate of 25.17% as there is net cash saving. However, set off of MAT credit which is not yet clear wheth set off is available or not and other market condition is also to be considered before switching to lower tax rate as once exercised can not be recersed.

The CBDT has introduced new section , Sec. 115BAB – Tax on income of domestic new manufacturing company where at the option of the assessee, may compute tax @ 15% plus surcharge and cess (effective tax rate comes to 17.16%) from the financial year 2019-20 provided assessee satisfies following conditions as mentioned in sub section 2.

a) The company has been set up and registered on or after 1stday of October, 2019, and has commenced manufacturing on or before 31st day of March, 2023;

b) The company is not engaged in any business other than the business of manufacture or production in relation  to article and research related thereto or distribution of such article;

c) The total income to be computed without taking incentive benefits like additional depreciation U/s 32(1)(iia), weighted deduction of R & D U/s 35(2AB) and Chapter VI-A deduction from Gross Total income like donation U/s 80G (other than 80JJAA benefit on employment);

d) The total income is to be computed by claiming the normal depreciation U/s 32(1)(ii) as may be prescribed. We hope that , CBDT may come out new depreciation rate for the assessee who may exercise this option;

e) Where it appears to Assessing Officer that owing to the close connection between the company and any other person , or for any other reason, it is producing more than the ordinary profit, he may recomputed the profit .

f) Transaction between holding company and new company will be part of specified domestic transfer pricing, may be required to be reported if it crosses limit of Rs. 20 crore.

g) The MAT provision is not applicable to this company;

h) This option is to be exercised at the time of filing of Return of Income on or before due date as prescribed U/s 139 (1) of the Act from the FY 2019-20. Once this option exercised, it will be applicable to subsequent year and can not be withdrawn.

i) This requires robust tax structuring, owning to GAAR, BEPS compliances.

j) The new company should not be replica of holding company otherwise concessional rate of tax benefit may be denied in the assessment. More clarification is awaited on this part.

Also Read relevant Press Releases and Notifications

Taxation Laws (Amendment) Ordinance, 2019

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