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Reduced corporate taxes

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Various amendments to Income-tax Act, 1961 {Finance (no.2) Act, 2019} has been introduced vide Taxation Laws (Amendment) Ordinance, 2019. In order to boost growth in this period of sluggish economy and to promote “Make in India” initiative, Govt. of India has made series of announcements stated here as under:

  1. A new section 115BBA has been introduced, which gives domestic companies an option to pay tax at reduced rates from 30 per cent to 22 per cent. Effective tax rate, including surcharge and applicable cess reduced from 34.944 per cent to 25.168 per cent.
  1. Another section 115BAB has been introduced wherein the setting up of domestic manufacturing companies incorporated after October 1, 2019 and has commenced manufacturing on or before March 31, 2023 has been incentivized with a reduced corporate tax rate of 15 per cent.

However for availing tax concession under section 115BBA and 115BAB a company must have complied with the following conditions:

  • No other deductions u/s 10AA, section 32AD, section 33AB or 33ABA, or under any provisions of Chapter VI-A under the heading C (like 80IA, 80IB, 80IC, etc.), is being claimed by the company.
  • Such companies shall also be deprived of claiming set off of any loss carried forward from any earlier assessment year, if such loss is attributable to specified deductions as above.
  • MAT provisions shall not be applicable to such companies.
  • Option once exercised, cannot be revoked for the same or any other previous year.
  • Depreciation shall need to be claimed in the manner which is yet to be prescribed.
  1. Minimum Alternate Tax (MAT) has been reduced from 18.5 per cent to 15 per cent.
  1. No tax on buy back of shares by listed companies which have already made a public announcement of buy-back before July 5, 2019.
  1. Enhanced surcharge of 15 per cent shall not apply on capital gains arising on account of sale of equity share in a company or unit of an equity oriented fund or unit of business trust liable for STT.

Impact of corporate tax cut rate

Below mentioned are some of the impacts of corporate tax rate cuts:

  1. It will boost Nifty earnings growth. Profitability of firms will improve. Analysts have accordingly revised earnings estimates upwards from 16 per cent to 25 per cent for 2019-20.
  2. India will become more globally competitive, inducing domestic and foreign investment and boosting exports, as India’s base corporate tax now on par with most Asian countries.
  3. Abheek Barau, Chief Economist of HDFC Bank addressed that tax rate cut can result in .20-.25 basis points in GDP growth.
  4. As per Icra’s estimates, the extent of benefit that would accrue to discoms from the power generation and transmission segments, mainly from central and state utilities, would be about Rs 2500 crore annually.
  5. However Govt. will face huge loss of tax revenue estimating INR 1, 45,000 crore.

Companies will have the option of lower tax rate after expiry of tax holidays and concessions they are availing now. Once they choose the new tax rate, they can’t go back to a concessional regime. This may help India attract some investments that are looking to shift out of China following the country’s spat with the US and also bring back investment in various sectors.

If you require any assistance in your tax compliances, tax computation, return filing, tax assessments or would like to discuss the above amendments further, our team of tax experts can assist you.

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