Time for Corporates to self-evaluate –Taxation Laws (Amendment) Act, 2019 –Part I

As it is said that, “The first step is the most important. It is the most crucial and the most effective as it will initiate the direction you have chosen.” For everything either in personal or professional life the first step that we take decides our path towards our goals, aims or ambitions. As for an industry the quality of its raw material decides the quality of its final product, if the material is shoddy then even if you apply the best technology or finest machinery, you could never produce a good quality of finished product. With the new year approaching and with passing of Taxation Laws (Amendment) Bill, 2019 by Rajya Sabha on 05 December 2019, The Taxation Laws (Amendment) Act, 2019  (‘the Act’) received the assent of the Hon’ble President on 11 December 2019 and was published on 12 December 2019 with effect from 20 September 2019 thereby introducing new tax rates for the Corporates. The Corporates now need to decide its tax structure basis its past trend of profits or losses and its vision for future. With the passing of new Act, the corporates have broadly been classified into four different tax structure i.e. 30%, 25%, 22%, 15% (without surcharge and cess) basis its turnover, its business structure and its date of incorporation. Apart from the tax rates being different, the surcharge and cess also differs among the different tax rates.

In this Article we would be discussing about the Applicability of the new provisions as introduced by The Taxation Laws (Amendment) Act, 2019; the different Structure of Companies and the options available to them.

A. Tax rates of company is broadly divided in two categories i.e. turnover based and conditional based from AY 2020-2021:

Particulars Turnover based Conditional based
Turnover upto INR 400 crore in FY 17-18 Turnover exceeding INR 400 crore in FY 17-18 Section 115BA Section 115BAA Section 115BAB
Tax Rate 25% 30% 25% 22% 15%
Surcharge
Taxable income upto 1 crore Nil Nil Nil 10% 10%
Taxable Income is greater than 1 crore 7% 7% 7% 10% 10%
Taxable Income is greater than 10 crore 12% 12% 12% 10% 10%
Health and Education cess 4% in all cases

Basis above the effective tax rate including surcharge and cess works out as under:

Particulars Effective Tax Rate (ETR)
Turnover upto INR 400 crore in FY 17-18 Turnover exceeding INR 400 crore in FY 17-18 Section 115BA Section 115BAA Section 115BAB
Taxable income upto 1 crore 26% 31.2% 26% 25.168% 17.16%
Taxable Income is greater than 1 crore 27.82% 33.384% 27.82% 25.168% 17.16%
Taxable Income is greater than 10 crore 29.12% 34.944% 29.12% 25.168% 17.16%

B. Applicability of the new provisions:

1. Section 115BAA (Corporate tax rate reduced to 22% for all domestic companies)

The Act has inserted a new Section 115BAA into the Income-tax Act, 1961 (‘IT Act’). All domestic companies can choose to be taxed at the rate of 22% (plus applicable surcharge and cess), provided that they do not avail of specified Deductions, Exemptions or Incentives (‘D,E or I’).

Domestic companies that avail of this reduced rate will not have to pay minimum alternate tax (MAT) under Section 115JB of the IT Act.

However, once a company opts to be governed by Section 115BAA of the IT Act, it cannot subsequently opt out.

2. Section 115BAB (Corporate tax rate reduced to 15% for new manufacturing companies)

The Act has inserted a new Section 115BAB into the IT Act, under which a reduced tax rate of 15% (plus applicable surcharge and cess) will apply to manufacturing companies which:

  • are set-up and registered on or after the 1st day of October 2019, and has commenced manufacturing or production of an article or thing on or before the 31st day of March, 2023;
  • company must not be formed by splitting up, or the reconstruction of a business already in existence (few relaxation applies in this regard);
  • company must not use machinery or plant previously used for any purpose. Used plant and machinery to the extent of 20% of total value of plant and machinery is permissible;
  • company must not use any building previously used as a hotel or a convention centre, as the case may be, in respect of which deduction under section 80-ID has been claimed and allowed
  • do not avail specified D,E or I.

Companies which opt for a reduced rate under Section 115BAB of the IT Act will be exempted from MAT. However, once a taxpayer opts to be governed by Section 115BAB of the IT Act, they cannot subsequently opt out.

It was clarified that the Corporates engaged in following business cannot opt for Section 115BAB:

  • development of computer software in any form or in any media;
  • mining;
  • conversion of marble blocks or similar items into slabs;
  • bottling of gas into cylinder;
  • printing of books or production of cinematograph film; or
  • any other business as may be notified by the Central Government in this behalf.

3. D, E or I (Deductions, Exemptions or Incentives)

The various deduction and exemptions which a company opting for section 115BA, 115BAA or section 115BAB cannot claim are as follows:

The total income of the Company has been computed:

1. without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” other than the provisions of section 80JJAA;

2. without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i); and

3. by claiming the depreciation, if any, under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

C. Now a Company can be a manufacturing or non-manufacturing; it can be a new company or an old company; its turnover can be above or below INR 400 crore. To understand the rate applicable first we should understand the sections which the Company can opt for:

Type of Company Section 115BA Section 115BAA Section 115BAB Turnover based rate
Manufacturing Company Formed before 01 March 2016 NA Available NA Available
Manufacturing Company Formed on or after 01 March 2016 but before 01 October 2019 Available Available NA Available
Manufacturing Company Formed on or after 01 October 2019 Available Available Available Available
Non-Manufacturing Company having turnover upto INR 400 crore NA Available NA Available
Non-Manufacturing Company having turnover greater than INR 400 crore NA Available NA Available

There are some other conditions that need to be explored by a Company before deciding the relevant section under which tax needs to be paid:

Particulars Section 115BA Section 115BAA Section 115BAB Turnover based
Year of incorporation Incorporated on or after 01 March 2016 Any year Incorporated on or after 01 October 2019 and commence manufacturing by 31 March 2023 Any year
Nature of Business Manufacturing Any Manufacturing Any
MAT Applicability Applicable (15% Rate) NA NA Applicable (15% Rate)
MAT credit entitlement Allowed NA NA Allowed
D, E or I Company cannot claim D, E or I Company cannot claim D, E or I Company cannot claim D, E or I Company can claim
When option to be exercised To be taken in first year before the due date specified under section 139(1) of the returns of income To be taken before the due date specified under section 139(1) for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after the 1st day of April, 2020 To be taken in first year before the due date specified under section 139(1) of the returns of income Any time

D. Conclusion

From above it can be concluded that the management would need to explore many situations before opting for any section under which tax needs to be paid, few situations are as under:

1. Whether the Company has brought forward losses or unabsorbed depreciation;

2. When the Company expects losses or profits in near future;

3. Whether the Company is paying tax under MAT or normal tax provisions;

4. Whether the Company have any brought forward MAT credit.

As self-evaluation encourages employees to think about and plan for their future with the organization, their next opportunity, possible promotions, different jobs they’d like to try, and cross-training they’d like to obtain. The self-evaluation is also an opportunity for employees to think about their careers either with the company or with another employer. Similarly with the introduction of The Taxation Laws (Amendment) Act, 2019 the Management of the Corporates need to self-evaluate whether to continue to remain in old tax structure or to opt under new tax regime by evaluating various situations, as discussed above. Apart from above situations the Company may also need to explore whether the current structure is beneficial for it or they should convert into a LLP or firm and for new entrepreneurs to decide which structure to be formed i.e. Company, LLP or a firm. We would discuss the same in the next article in continuation to this Part.

DISCLAIMER: The views expressed in this article are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation by the author. The author does not accept any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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