New Tax Rate for Domestic Companies

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CORPORATE TAX – AN ANALYSIS BASED ON TAX LAWS (AMENDMENT) ORDINANCE 2019

The Tax Laws (Amendment) Ordinance, 2019, which came into force on 20th September, 2019, brings in major amendments with regard to taxation on Corporates. The Ordinance bring option to domestic companies to continue with the present scheme and continue enjoying the exemptions and incentives or to opt for the reduced tax rate prescribed for the existing domestic companies under this ordinance. The same will be applicable from the Financial Year 2019-20 (Assessment year 2020-21).

As per the ordinance, two set of rates were prescribed:

  1. Section 115BAA – 22% Tax rate for existing domestic companies
  2. Section 115BAB – 15% tax rate for manufacturing domestic companies incorporated on or after 01st October, 2019.

Effective Tax Rate

Even though the rate of Income Tax prescribed under Section 115BAA and Section 115BAB is 22% and 15% respectively, the ordinance amends Finance (No.2) Act, 2019 and inserted a new surcharge provision for income chargeable under these sections. As per the ordinance a surcharge of 10% is applicable on the income tax and the same has to be increased by the cess at 4%. So the effective rate of tax will be 25.168% (22 x 1.10 x 1.04) in case of Section 115BAA and 17.16% for Section 115BAB.

Minimum Alternate Tax (MAT)

As per the Ordinance, MAT will not be applicable for those domestic companies opting to pay Income Tax as per the provisions of Section 115BAA and Section 115BAB of the Income Tax Act. For those companies who are not opting or eligible to opt the scheme, the rate of MAT will be 15% from FY 2019-20. The same was 18.50% earlier, and the same is reduced now to 15%.

The Conditions for availing the reduced tax rate is discussed in detail below:

  1. Section 115BAA – Tax Rate of Existing Companies – 22%

The following are the conditions to be complied with by the existing domestic Companies

  1. Following deductions should not be claimed while calculating total income.
  2. Section 10AA – Exemption for special economic zone.
  3. Section 32(1)(iia) – Additional deduction for plant and machinery for setting up manufacture or production of any article or thing on or after 01.04.2015
  4. Section 32AD-Investment in new plant & machinery in notified backward areas in certain states.
  5. Section 33AB – Tea Development/Coffee Development/Rubber Development Account- Deduction for assesses carrying on business of growing and manufacturing Tea/Coffee/Rubber on deposit of amount in any national bank as per the scheme approved by Tea/Coffee/Rubber board.
  6. Section 33ABA – Site Restoration Fund-Deposit by an assesse carrying on business consisting of the prospecting for or extraction or production of petroleum or natural gas.
  7. Section 35 – Scientific Research
    • Sum paid to research organization – Section 35(ii)
    • Sum paid to a company to be used by it for scientific research – Section 35(iia)
    • Sum paid to a research association/university/college/other institution undertaking research in social science or statistical research – Section 35(iii) 
    • Sum paid to National laboratory/university/IIT with a specific direction to use for scientific research – Section 35(2AA)
    • Expenditure incurred by a company engaged in the business of bio-technology and incurs expenditure in scientific research – Section 35(2AB)
  8. Section 35AD-Expenditure on specified business, whole of any expenditure of capital nature incurred for specified business.
  9. Section 35CCC – Expenditure on agriculture extension project by an assessee.
  10. Section 35 CCD-Expenditure on skill development by a company.
  11. Heading C of Chapter VI A except section 80JJAA In respect of employment of new employees. Deduction in respect of profit from:
    1. Newly established industrial undertaking or hotel business in backward areas – Section 80HHNewly established SSI undertaking in certain areas – Section 80HHA
    2. Projects outside India – Section 80HHB
    3. Certain type of housing projects – Section 80HHBA
    4. Profits retained for export business – Section 80HHC
    5. Earnings in convertible foreign exchange – Section 80HHD
    6. Export of computer software – Section 80HHE
    7. Export /Transfer of film/software etc. – Section 80HHF
    8. Industrial undertaking after a certain date etc – Section 80 I
    9. Industrial undertaking /enterprises engaged in infrastructure development etc. – Section 80IA
    10. Undertaking /enterprise engaged in development of SEZ – Section 80IAB
    11. Eligible start up – Section 80IAC
    12. Industrial undertaking other than infrastructure development undertaking – Section 80IB
    13. Certain undertaking/enterprise in certain special category states-Section 80 IC
    14. Hotels & Convention centers in specified area – Section 80ID
    15. Certain undertaking in North-Eastern states – Section 80IE
    16. Business of collecting & processing  biodegradable waste – Section -80 JJA
    17. Incomes of offshore banking units & IFSC – Section 80LA

B. Set off carry forward loss attributable to above deductions (Point 1), such losses shall be deemed to have been given full effect.

C. Additional depreciation on plant & machinery should not be claimed.

D. Income tax return should be filed within the due date mentioned under section 139(1)

E. Option once exercised shall apply to the subsequent assessment years and the same cannot be with draws for the same or any other previous year.

2. SECTION 115 BAB – Tax on new domestic manufacturing companies – Tax Rate 15%.

The following are the conditions to be complied with by the manufacturing domestic Companies, incorporated on or after 01st October, 2019.

  1. Company set- up and registered on or after 01.10.2019 and has commenced manufacturing on or before 31.03.2023.
  2. Not formed by splitting up or reconstruction of a business already in existence. Exception will be undertaking which is formed as a result of reestablishment of any undertaking as referred in section 33 B/ value of such P&M should not exceed 20% of value of total P&M.
  3. Doesn’t use plant & machinery previously used. Exception will the P&M used outside India which is not used in India earlier and claimed depreciation and the same was imported into India.
  4. Doesn’t use any building previously used as hotel or convention center.
  5. Should not engaged in any other business other than business of manufacture/production of article/thing and research in relation to such article/thing.
  6. All Conditions related to section 115BAA also needs to be complied with.
  7. Assessing officer have power to add reasonable amount of profit owing to close connection between the company and the other person or for any other reason, the course of business between them is so arranged that business transacted between them produces to the company more than the ordinary profits.
  8. In case of specified domestic transaction under section 92BA, the amount of profit is determined having regard to arm’s length price.
  9. Returns to be filled within due date.

New Tax Rate for Domestic Companies

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