CORPORATE TAX DEDUCTIONS

On 20 September, 2019, the Indian Government introduced the Taxation Laws (Amendment) Ordinance, 2019 to make certain amendments to the Income Tax Act, 1961 (the IT Act). The changes include a reduced Corporate Tax.

Below are some of the key changes:

In order to promote growth and investment, a new provision has been inserted in the IT Act which will be effective from April 1, 2019, to allow any Indian company an option to pay income tax at the rate of 22%, subject to the condition that they will not avail any tax exemptions or tax incentives that are provided under the IT Act. The effective corporate tax rate for these companies will work out to be 25.17% inclusive of surcharge and education cess. It has also been proposed that such companies will not be required to pay Minimum Alternate Tax (MAT).

Manufacturing Companies:

In order to attract fresh investment in the manufacturing sector and to provide a boost to the “Make in India” initiative, a new provision has been added in the IT Act which will be effective from April 1, 2019, to allow a new Indian company that is incorporated on or after October 1, 2019, making fresh investments in the manufacturing sector, an option to pay income tax at the rate of 15%.

This benefit will be available to companies that do not avail any tax exemptions or tax incentives and commences its production activities on or before March 31, 2023. The effective tax rate for these companies works out to 17.01% inclusive of surcharge and cess. It has also been proposed that such companies shall not be required to pay MAT.

Hotels with room tariffs of up to Rs 1,000 need not pay any GST. For those with tariffs of Rs 1,001-7,500, the tax will be 12%, and for those offering rooms at more than Rs 7,500 a night, the levy will be 18%.

Tax on Buyback of Shares:

Previously, unlisted companies were alone liable for a buyback distribution tax. With effect from July 5, 2019, the IT Act extended this obligation to listed companies as well. In order to provide relief to listed companies that have already made a public announcement of buyback of shares before July 5, 2019, it has been provided that the buyback distribution tax on buyback of shares in case of such companies shall not be charged.

The Indian Government’s proposal to reduce the corporate tax rate for domestic companies is a positive long-term structural move to boost the economy and raise demand across sectors, especially manufacturing. Domestic companies have a lot to cheer about, and hopefully, foreign investments will see a pickup, both in the foreign direct investment and foreign portfolio formats.

GOVIND GUPTA

ASSOCIATE