D etailed A n alysis o f Taxation Laws (A me ndm ent) A ct, 2...

Detailed Analysis of Taxation Laws (Amendment) Act, 2019

Pune (West) CPE Study Circle

19 January 2020

Ameya Kunte

Agenda

• Background

• Corporate Tax Rate Reduction

• Section 115BAA – 22% Tax Rate

• Section 115BAB – 15% Tax Rate

• Other Amendments

• Analysis, Case Studies and Issues

2

Background

3

Background

• 23 August 2019 – Series of announcements by FM on various fiscal and non-fiscal

measures

• 20 September 2019 - The Taxation Laws (Amendment) Ordinance, 2019 providing for a major reduction in corporate tax rates

• To repeal and replace the Ordinance, The Taxation Laws (Amendment) Bill, 2019 was introduced in Lok Sabha on 25 November 2019.

• The Amendment Bill, was approved by the Parliament and received assent of President of India on 11 December 2019

• The Taxation Laws (Amendment) Act, 2019 amends the Income-tax Act, 1961 and the Finance (No. 2) Act 2019

4

Rationale

• Urgent need to take fiscal measures so as to boost investment and growth in the economy

• Many countries world over had reduced corporate income tax to attract investment and create employment opportunities

• Similar measures necessitated in the form of reduction of corporate tax payable by domestic companies in order to make Indian industry more competitive

• Fiscal stimulus through corporate tax rate reduction so as to attract investment, generate employment and boost the economy

• Tax revenue forgone – Rs 145,000 crore

5

Corporate Tax Rate Reduction

6

Existing Corporate Rates

Particulars Large Domestic

Cos.

Small Domestic

Cos. (up to Rs

400 cr turnover)

Sec.115BA Co.

(Set up on or

after 1 March,

2016 and

engaged in

manufacturing)

Foreign Co.

Base Tax Rate 30% 25% 25% 40%

Effective Tax

Rate

34.94% 29.12% 29.12% 43.68%

Exemptions/Ince

ntives

Yes Yes No Yes

MAT u/s 115JB

rate

21.55% 21.55% 21.55% 20.20%

7

Highlights - Reduced Corporate Tax Rates

• The Taxation Laws (Amendment) Act, 2019 reduced the general corporate tax rate to 22% for all the companies (subject to certain conditions)

• Further, a reduced rate of 15% is made applicable to the manufacturing companies (subject to certain conditions)

• MAT has been reduced from 18.5% to 15%

• The Amendment Act provides for uniform rate of surcharge of 10% for domestic companies availing 22% tax rate or 15% tax rate on all types of incomes including capital gains

8

Section 115BAA – 22% Tax Rate

9

22% Tax Rate – Overview

• The reduced rate of 22% (effective rate of 25.17%) applicable to all, existing as well as new domestic companies

• No threshold of the turnover provided for

• Applicable to all the sectors, manufacturing and service entities

• New rate available from current financial year (i.e. applicable from AY 2020-21 and onwards). [other than companies opting for 115BA and 115BAB]

• MAT is not applicable

• Specified conditions should be satisfied to be eligible to claim this reduced tax rate

• MAT credit cannot be set-off once the option is exercised

10

22% Tax Rate – Conditions

• Specified deductions (see next slide) cannot be claimed

• Losses c/f and depreciation of earlier AY attributable to specified deductions to lapse.

• Losses c/f and allowances of unabsorbed depreciation u/s 72A (arising post amalgamation) attributable to specified deductions to lapse.

• Depreciation will be allowed as per rates prescribed except u/s 32(1)(iia) (i.e. additional depreciation is not allowed).

• Where the full effect of depreciation allowance of block of assets has not been given prior to AY2020-21, corresponding adjustment shall be made to WDV of block of assets as on April 1, 2019 ( a one-time adjustment)

• Unit in IFSC explained in 80LA(1A) exercising option u/s 115BAA(5) can claim deduction u/s 80LA subject to the fulfillment of the conditions in the said section along with conditions in 115BAA(2)

11

Specified Ineligible Deductions

Sections Deduction/Incentive

10AA Deduction for units established in Special Economic Zones (SEZ)

32AD Deduction for investment in new plant and machinery in notified backward areas

33AB Deduction in respect of tea, coffee or rubber business

33ABA Deduction in respect of business consisting of prospecting or extraction or

production of petroleum or natural gas in India

35(1)(ii)* Deduction for donation made to approved scientific research association, university

college or other institutes for doing scientific research which may or may not be

related to business

35(1)(iia)* Deduction for payment made to an Indian company for doing scientific research

which may or may not be related to business

35(1)(iii)* Deduction for donation made to university, college, or other institution for doing

research in social science or statistical research

12 * Deduction u/s 35(1)(iv)-capital expenditure on scientific research -continues to be allowable



35(2AA) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific

research which may or may not be related to business

35(2AB) Deduction for capital expenditure (excluding cost of land and building) on in house

scientific research relating to business of bio-technology or manufacturing any

article or thing

35AD Deduction in respect of capital expenditure incurred in respect of certain specified

businesses, i.e., cold chain facility, warehousing facility, etc.

35CCC Deduction for expenditure on agriculture extension project

35CCD Deduction for expenditure on skill development project

Part C of

Chapter VIA

Primarily profit linked deductions (except Section 80JJAA – deduction relating to

new employment)

13

22% Tax Rate – Exercise of Option

• The option to exercise the lower rate [u/s 115BAA] can be exercised on or before due date of filing the return for any year

• Option once exercised shall apply to subsequent years

• The option once exercised cannot be withdrawn

• Where the option exercised u/s 115BAB (15% tax rate) has been rendered invalid due to violation of S.115BAB(2)(a)(ii),115BAB(2)(a)(iii) and 115BAB(2)(b), such taxpayers can opt for Sec. 115BAA.

14

Section 115BAB – 15% Tax Rate

15

15% Tax Rate - Overview

• Lower tax rate of 15% (effective rate of 17.16%) applicable to a new domestic manufacturing company set-up after October 1, 2019

• No threshold of the turnover provided for

• MAT is not applicable

• Specified conditions should be satisfied to be eligible to claim this reduced tax rate

16

15% Tax Rate – Eligible Businesses

Eligible Business

• Company must be engaged in the business of manufacture or production of any article or thing or research in relation to or distribution of, such article or thing manufactured or produced by it.

Ineligible Businesses [Sec 115BAB(2)]

• Software development

• Mining

• Conversion of marble blocks or similar items into slabs,

• Bottling of gas into cylinder,

• Printing of books or production of cinematograph films,

• Any other business as notified by the Central Government

17

15% Tax Rate – Key Formative Conditions

[Sec 115BAB(2)]

• New domestic manufacturing companies set up and registered on or after 1 October 2019 and commencing manufacture or production of an article or thing by 31 March 2023

• The business is not formed by splitting up or reconstruction of a business already in existence.

• Such condition shall not apply in respect of re-establishment, reconstruction or revival of business referred in section 33B

• Does not use any machinery or plant previously used for any purpose

• This condition is applicable year on year and not only at the time of formation

• Old machinery up to 20% is permissible

• Building previously used as a hotel or a convention center for which benefit u/s 80-ID has been claimed cannot be used

18

15% Tax Rate –Other Conditions (Losses)

[Sec 115BAB(2)]

• Specified deductions (see next slide) cannot be claimed

• Losses c/f and allowances of unabsorbed depreciation u/s 72A (arising post amalgamation) attributable to specified deductions to lapse.

• Depreciation will be allowed as per rates prescribed except u/s 32(1)(iia) (i.e. additional depreciation is not allowed).

19



10AA Deduction for units established in Special Economic Zones (SEZ)

32AD Deduction for investment in new plant and machinery in notified backward areas

33AB Deduction in respect of tea, coffee or rubber business

33ABA Deduction in respect of business consisting of prospecting or extraction or

production of petroleum or natural gas in India

35(1)(ii)* Deduction for donation made to approved scientific research association, university

college or other institutes for doing scientific research which may or may not be

related to business

35(1)(iia)* Deduction for payment made to an Indian company for doing scientific research

which may or may not be related to business

35(1)(iii)* Deduction for donation made to university, college, or other institution for doing

research in social science or statistical research

20 * Deduction u/s 35(1)(iv)-capital expenditure on scientific research -continues to be allowable



35(2AA) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific

research which may or may not be related to business

35(2AB) Deduction for capital expenditure (excluding cost of land and building) on in house

scientific research relating to business of bio-technology or manufacturing any

article or thing

35AD Deduction in respect of capital expenditure incurred in respect of certain specified

businesses, i.e., cold chain facility, warehousing facility, etc.

35CCC Deduction for expenditure on agriculture extension project

35CCD Deduction for expenditure on skill development project

Part C of

Chapter VIA

Primarily profit linked deductions (except Section 80JJAA – deduction relating to

new employment)

21

15% Tax Rate – Exercise of Option

• Option must be exercised in the first year of operation before the due date of filing of the return of income

• Such option will apply to the subsequent years

• The option cannot be withdrawn subsequently

22

Domestic Transfer Pricing

• Owing to close connection between the person opting Sec.115BAB with any other person in course of business which benefits him wherein more than ordinary profits are earned, the AO may compute profits & gains u/s 115BAB in reasonable manner considering the transfer pricing guidelines

• Such excess profits are taxed @ 30%

23

15% Tax Rate – Exceptions

• If the income is neither derived nor incidental to manufacturing or production of any article or thing and in respect of which no specific rate of tax has been provided, such income will be taxed @ 22% and no deduction and allowance shall be allowed

• Income tax payable for short term capital gain derived from transfer of capital assets on which no depreciation is allowable shall be taxed @22%.

24

Failure to Satisfy Conditions - Consequences

• If the conditions stated in Sec 115BAB(2) are not satisfied in any of the years, the option of lower rate of tax of 15% becomes invalid forever

• The other provisions of the Act shall apply as if the option had never been exercised

• Where the option exercised u/s 115BAB has been rendered invalid due to violation of Sec.115BAB(2)(a)(ii),115BAB(2)(a)(iii) and 115BAB(2)(b), such taxpayers can opt for Sec. 115BAA (i.e. 22% tax rate).

• Sec.115BAB(2)(a)(i) relating to formative conditions is not covered here.

25

15% Tax Rate – Enabling Powers to Govt

• In case of any difficulty in fulfillment of conditions mentioned in sub-section(2)(a)(ii) or (iii) or sub-section(2)(b), CBDT may issue guidelines to remove the difficulties and to promote manufacturing or production using new plant and machinery

• Every such guideline issued by the CBDT shall be laid in each house of Parliament and shall be binding on person and income-tax authorities.

26

Other Amendments

27

Rollback of Enhanced Surcharge

28

Sub-Clause I

10% of such tax

where the income

and aggregate of

such incomes

including the

income under the

provisions of S.

111A and 112A of

IT, Act (Inserted by

the Amendment)

[ income limit > 50

lacs - 1 Cr]

Sub-Clause II

15% of such tax

where the income

and aggregate of

such incomes

including the

income under the

provisions of S.

111A and 112A of


the Amendment)

[ income limit > 1

Cr – 2 Cr]

.

Sub-Clause III

25% of such tax

where the income

and aggregate of

such incomes

excluding the

income under the

provisions of S.

111A and 112A of


the Amendment)

[ income limit > 2

Cr – 5 Cr]

Sub-Clause IV

37% of such tax

where the income

and aggregate of

such incomes

excluding the

income under the

provisions of S.

111A and 112A of


the Amendment)

[ income limit > 5

Cr]

Sub-Clause V

15% of such tax where

the income and

aggregate of such

incomes including the

income under the

provisions of S. 111A and

112A of IT, Act (Inserted

by the Amendment)

[ income limit > 2 Cr]

.

Buyback Tax – Transitional Relief

• The Finance Act 2019 extended Buyback tax to buyback of shares by listed companies on or after 5 July 2019.

• Section 115QA provides for a buy-back tax at 20%

• The Amendment Act provides a transitional relief by way of exception with respect to buybacks which were announced before the budget announcement on 5 July 2019

29

Analysis, Case Studies and Issues

30

Comparative Rates

S.

No.

Nature of Domestic Company Current ETR (%) ETR on exercise of

option (%)

Reduction in

Tax Liability

(%)

1

Total turnover or gross receipts =< INR 400 cr

during FY 2017-18 or new manufacturing

companies incorporated between March 01,

2016 and September 30, 2019

•Income < INR 1 cr

•Income > INR 1 cr but < 10 cr

•Income > INR 10 cr

26

27.82

29.12

25.17

25.17

25.17

0.83

2.65

3.95

31

Comparative Rates

S.

No.

Nature of Domestic Company Current ETR (%) ETR on exercise of

option (%)

Reduction in

Tax Liability

2 Optional tax rate for new manufacturing

companies incorporated on or after October

01, 2019




26

27.82

29.12

17.16

17.16

17.16

8.84

10.66

11.96

3 Other domestic companies




31.2

33.38

34.94

25.17

25.17

25.17

6.03

8.21

9.77

32

LLP vs Company – Comparative Analysis

Particulars Company

(15%)

Company

(22%)

LLP Individuals

(MMR)

Corporate Tax Rate 15% 22% 30% 30%

Applicable Surcharge 10% 10% 12% 37%

Applicable Cess 4% 4% 4% 4%

Effective Tax Rate 17.16% 25.17% 34.94% 42.74%

Dividend Distribution Tax

(without Gross up)

17.47% 17.47% Not Applicable

Tax on Dividend (in hands of

Individuals)

14.25% 14.25% Not Applicable

33

LLP vs Company – Comparative Analysis

Particulars Company

(15%)

Company

(22%)

LLP Individuals

(MMR)

Business earns PBT of INR 100 cr

Profit before Tax (INR cr) 100 100 100 100

Tax on PBT -17.16 -25.17 -34.94 -42.74

Profit after Tax 82.84 74.83 65.06 57.26

DDT -14.47 -13.07 NA NA

Income in the hands of shareholder 68.37 61.76 65.06 57.26

Tax in the hands of the Individual -9.74 -8.80 Exempt NA

Cash Balance in hands of individual 58.63 52.96 65.06 57.26

Ultimate Effective Tax 41.37% 47.04% 34.94% 42.74%

34

22% Rate – Case Study 1 Use of MAT Credit

35

SEZ

Unit

Non-SEZ

Unit Total

Profits 500 1000 1500

10AA Deduction 500 0 500

Income 0 1000 1000

Normal Tax Rate 34.94%

Normal Tax 349

MAT Rate 17.47%

MAT 262

MAT Credit Available 500

MAT credit utilised 87

MAT Credit Carried

Forward 413

Effective Tax (current) 262

Effective Tax Rate 17.47%

New Corporate Tax Rate 25.17%

Tax 378

22% Rate – Case Study 2 Low SEZ Income

36

SEZ

Unit

Non-SEZ

Unit Total

Profits 500 5000 5500

10AA Deduction 500 0 500

Income 0 5000 5000


Normal Tax 1747

MAT Rate 17.47%

MAT 961



Normal Tax or Tax (Higher) 1747

MAT Credit Carried

Forward 0

Effective Tax 1747



Tax (New Regime) 1384

22% Rate – Case Study 3 High SEZ Income

37

SEZ

Unit

Non-SEZ

Unit Total

Profits 10000 5000 15000

10AA Deduction 10000 0 10000

Income 0 5000 5000


Normal Tax 1747

MAT Rate 17.47%

MAT 2621



Normal Tax or Tax (Higher) 2621

MAT Credit Carried

Forward 0

Effective Tax (Current) 2621



Tax 3776

22% Rate – Case Study 4 Demerger of non SEZ Unit

38

SEZ Co Non-SEZ Co Total

Profits 10000 5000 15000

10AA Deduction 10000 0 10000

Income 0 5000 5000

0

Normal Tax Rate 34.94% 34.94% 34.94%

Normal Tax 0 1747 1747

MAT Rate 17.47% 17.47% 17.47%

MAT 1747 874 2620.5

MAT Credit Available 0 0 0

MAT credit utilised 0 0 0

Normal Tax or Tax (Higher) 1747 874 2620.5

MAT Credit Carried Forward 0 0 0

Effective Tax 1747 -

Effective Tax Rate 17.47% 17.47%

Tax (1747 + 1259) 3006

New Corporate Tax Rate 25.17% 25.17%

Tax 2517 1259

Key Drivers for Selecting 22% option

• Quantum of MAT credit available

• Composition of tax holiday and non-tax holiday income (28% tax incentives – a break even point)

• Income forecasting over the period and NPV thereof

• Importance of cash flow to the business versus MAT credit in future

• Commercial factors

• GAAR risk

39

15% Tax Rate – Test of condition

40

Condition Point of test

Set-up & registered on or after October 1, 2019 1st Year

Commencement of Manufacturing on or before March 31, 2023

Not formed by splitting up or restructuring of existing business 1st Year

Second-hand plant and machinery & use of hotel & convention center Year-on-year ?

Engaged in any other business Year-on-year

Not to claim specified deductions Year-on-year

15% Tax Rate – Certain Business Scenarios

• Job work manufacturing

• Combined Business including trading / service income

• Business Expansion – Splitting-up test

• Definition of production and manufacture – packaging / labelling ?

41

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411 038, India

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42

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