Discuss the impact of Taxation Laws Amendment Bill, 2019 on Corporate Tax

The author in this article discusses the impact of Taxation Laws Amendment Bill, 2019 on Corporate taxes. The author further discusses the related provisions and figures to the same for better understanding.
Estimated Reading Time: 9 minutes

Introduction

Government or the ruling authority has been collecting tax since ages to provide essential services to the people residing in the state. It was levied either-on sale or purchase of goods or livestock.  It is evident from the fact that around 2000 years ago a decree was passed by the Ceaser Augustus, which stated that all the world should be taxed. Taxes were levied on the basis of annual turnover and occupation in ancient Greece, Germany and Roman Empires and the collection went to the Monarch. The taxes were also levied on land and movable property in Northern England during 1188. Later on, the taxes were converted into pool tax, which was levied on wool, leather and hides. These were imposed to maintain the state and the army of the state.

This does not mean that taxes were not imposed in India. It can be found in Manu Smirti and Arthasatra the variety of measures to collect tax. The vice sage, Manu, advised that the taxes could be levied according to Sastras, which were in accordance with the occupation and sourceof money. He also advised that the King should not have the power to charge excessive taxes nor he should make the taxes zero. There is to be a balance that should be maintained. 

In the modern age, the taxes are charged on basis of income (a biological person or a corporate person), goods and services, import/ export duty etc and the rate varies depending upon the income or the value of the subject. Recently, the Government amended the taxation law thorough the Taxation Laws (Amendment) Ordinance 2019. 

Highlight of the Ordinance of the Bill

In an attempt to simplify the Income Tax structure, and other direct taxes and establish a uniform tax rate along with minimum exemptions, Draft Taxes Code was released in the year 2009. Subsequently it was introduced in the year 2010 in Lok Sabha with a proposed 30% tax on domestic companies, though it lapsed with the dissolution of the 15th Lok Sabha. 

It was noted by the Finance minister in the budget speech, where it was noticed that India had a higher tax rate as compared to other Asian countries, due to which the Indian market was not competitive. So, the Finance minister proposed to reduce the task rate from an existing 30% to 25% and also reduce the exemption in tax. A task force was constituted in November 2017, and the report was submitted in August 2019. 

In, India, the companies pay their respective taxes under the Income Tax, 1961. Where the domestic companies incorporated in India are required to pay 25% as income tax in case of the annual turnover of more than 400 crores where as other domestic companies are required to pay taxes at 30%. In addition, there is a surcharge plus Health and Education cess. The company could opt for flat a 22% tax rate if they want to claim the certain deductions. It included the following deduction:

  1. newly established units in Special Economic Zones (SEZs),
  2.  investment in new plant or machinery in notified backward areas, 
  3. expenditure on scientific research, agriculture extension, and skill development projects, 
  4. depreciation of new plant or machinery (in certain cases), and 
  5. various other provisions in the IT Act under Chapter VI-A.

The actual tax rate varies as follows:

 

Turnover up to Rs 400 crore

Turnover more than Rs 400 crore

Income up to one crore rupees

26%

31.2%

Income between Rs 1 crore and Rs 10 crore

27.8%

33.4%

Income more than Rs 10 crore

29.1%

34.9%

The bill provides new manufacturing companies to pay the tax at the rate of 15%, provided they are registered after September 2019 and started their manufacturing before April 1, 2023, provided certain conditions were met. 

  1. The company shall not be formed by splitting up or reconstruction of an existing business, 
  2. Engaged in any business other than manufacturing or production, and 
  3. Using any plant or machinery previously used in India (except under certain specified conditions).

The business which will not be considered as manufacturing business are in 

  1. development of computer software, 
  2. printing of books, 
  3. production of a cinematograph film, 
  4. mining, and 
  5. any other business notified by the central government.

A company can opt for new tax laws in the financial year of 2019-20 or in any further financial year, but once a company has opted for the reduced tax rate, it will be applied for the all the subsequent years. In case the company does not follow certain conditions, they cannot exercise the option for the tax for the particular year and the subsequent years. When the rate of 15% becomes invalid, then in that case, the company can opt for a 22% tax rate.

Domestic companies have to pay a surcharge at 7% when the income is between INR 1 crore and INR 10 crore. When the income exceeds INR 10 crore, the rate is 10%. Companies for opting for new rate of 15% have to pay 10% surcharge. 

Minimum Alternate Tax (MAT) is the base measure of assessment required to be paid by an organization, on the off chance that its normal tax liability falls under a specific limit after claiming the deductions. This limit is determined as a specific rate (i.e. the MAT rate) of the organization’s book benefit. The Ordinance reduces the MAT rate from 18.5% to 15% with impact from the assessment year 2020-21 (i.e. the financial year 2019-20). The bill also provides provisions that MAT credit under the IT Act will also not apply to such companies. The MAT is the additional amount that the company requires to pay to pay in excess of the standard tax liability. This MAT can be used by the company to pay the task in future which shall be no longer than 15 years. 

Surcharge is levied on the tax paid on the income. The following are the rate of surcharge applicable:

  1. 10% of tax, for income between Rs 50 lakh and one crore rupees, 
  2. 15% of tax, for income between one crore rupees and two crore rupees, 
  3. 25% of tax, for income between two crore rupees and five crore rupees, and 
  4. 37% of tax, for income more than five crore rupees.

The bill provides different surcharge rate on capital gains and separates it from all other income. The Capital gains will also be subject to surcharge as per the above slabs, if the total income does not exceed one crore rupees. Otherwise, a flat 15% rate of surcharge will be applicable for capital gains.

Though, this provision is only applicable to certain cases like:

  1. investments by foreign institutional investors, and 
  2. investments by domestic persons in securities where the securities transaction tax is paid.

Analysis and the key issues of the Bill

The bill provides for a tax rate that domestic companies can opt for, i.e. 22% tax rate and new domestic manufacturing companies can opt for 15% tax rate provided that they do not claim the certain deductions.  Including surcharge and cess, companies opting for these tax rates are statutorily required to pay tax at the rates of 25.17% and 17.16%, respectively. Before, the bill the earlier tax rate used to vary from 26% to 35%, however it could be reduced claiming certain deduction under the IT Act, 1961. 

Comparing the effective tax rate

Effective tax rates after deductions (2017-18)

Effective tax rate after deductions

Proportion of companies

Share in total tax paid

Less than zero and zero

45%

1%

0% to 20%

10%

8%

20% to 25%

5%

22%

25% to 30%

19%

16%

30% to 33%

6%

42%

More than 33%

4%

11%

Zero profit before taxes

11%

0%

The above table provides for the data for 8.4 lakh companies that filed the income tax return during the Financial Year 2017-18. About 29% of the total companies paid the tax at an effective rate of 25%. It is also to be noted that these companies contributed to almost 69% of the total income tax paid by all companies in the Financial year 2017-18. 

In the Q2 of the FY 2019-20, about 48 companies of the BSE 100 have opted for the new rate and the rest 52 have not given a clear indication regarding the tax rate. The actual impact of companies opting for the lower tax rate would depend on the no. of companies opting for these options and the difference between their actual tax rate and new effective tax rate. Though this will result in the loss of revenue which the ministry has stated to be about at INR 1.45 lakh crore. Which is equivalent to 5.2% of the total revenue of the government estimated for 2019-20. 

Deductions under the Income Tax Act, 1961: The Bill specifies certain deductions under IT act which cannot be claimed by companies opting for the new rates. The deduction by these companies was about INR 1.2 lakh crore in the FY 2017-18. The deductions can be classified from the table below.

Deductions that cannot be claimed

Revenue impact

Deductions that can be claimed

Revenue impact

Accelerated depreciation

Rs 58,326 crore*

Donations to charitable trusts and institutions

Rs 1,860 crore

Export profits of SEZ units

Rs 20,918 crore*

Employment of new employees

Rs 738 crore

Profits of power sector undertakings

Rs 13,157 crore

Contributions to political parties

Rs 133 crore

Expenditure on scientific research

Rs 6,832 crore*

 

 

Profits of undertakings set-up in Sikkim

Rs 2,321 crore

 

 

Profits of undertakings set-up in Uttarakhand

Rs 1,798 crore

 

 

Various other deductions

Rs 13,986 crore

 

 

*the deduction can be claimed with the new category of the rates

The company currently availing the deductions, which cannot be claimed with the new rates, may continue with the existing rate for some time and can be done till thebenefits from deductions are more than those from lower rates. It should be noted that the company can opt for a new rate of deduction in any other future year. 

The table below shows the major deductions for the companies.

Deductions that cannot be claimed

Revenue impact

Deductions that can be claimed

Revenue impact

Accelerated depreciation

Rs 58,326 crore*

Donations to charitable trusts and institutions

Rs 1,860 crore

Export profits of SEZ units

Rs 20,918 crore*

Employment of new employees

Rs 738 crore

Profits of power sector undertakings

Rs 13,157 crore

Contributions to political parties

Rs 133 crore

Expenditure on scientific research

Rs 6,832 crore*

 

 

Profits of undertakings set-up in Sikkim

Rs 2,321 crore

 

 

Profits of undertakings set-up in Uttarakhand

Rs 1,798 crore

 

 

Various other deductions

Rs 13,986 crore

 

 

*the deductions can be claimed with the new rates

A brief comparison with the corporate tax being levied in countries

The table below shows that tax rates in different countries. The tax in India is highest, and it discouragesthe national as well the international corporate corporates to start of setup business in India. With the reduced rate, India could see an increase in the number of upcoming business as an increase in the GDP. Also, it would increase the rank of India in ease of doing business index and helped to make India a freer economy. A free economy is a type of economy where there is least government intervention and control. This allows the manufacturer to produce goods and provide services according the need of the consumer and set the price according to the demand as opposed to government setting or limiting prices and regulating the production. 

Asia

Tax rate

Asia

Tax rate

Europe

Tax rate

Americas

Tax rate

Others

Tax rate

Hong Kong

16.5%

Indonesia

25%

UK

19%

USA

25.8%

South Africa

28%

Singapore

17%

China

25%

Russia

20%

Canada

26.8%

New Zealand

28%

Thailand

20%

South Korea

27.5%

Italy

27.8%

Argentina

30%

Australia

30%

Vietnam

20%

Japan

29.7%

Germany

29.8%

Mexico

30%

 

 

Malaysia

24%

India#

35%

France

34.4%

Brazil

34%

 

 

Impact

This bill was passed in the Month of September 2019. Many companies would not have shifted to the newer tax rate as the Financial Year 2019-20 has begun. As stated above, 52 companies of BSE have opted for a new tax rate. The current pandemic situation which has caused the economic crisis is also restricting newer investments. The growth rate of GDP due to the pandemic is the worst. The growth rate of World GDP was -0.1% during the 2009 recession while the current growth rate is -3.0%. Though it is anticipated that the economy will grow at 5.8% in 2021. Although, the global crisis has discouraged new investors currently, but in the long run India may witness more investors in the upcoming years.

Hey there!

come here often?

Login To Come In