New Income Tax Rates for Domestic Companies from AY 2020-21: On 20th September 2019 the President of India has promulgated an ordinance Taxation Laws (Amendment) Ordinance, 2019 through which income-tax rates on domestic companies and domestic manufacturing companies reduced to 22 per cent and 15 per cent respectively by introducing section 115BAA and section 115BAB.
Further, the income-tax rate on Book Profit under section 115JB or MAT for on domestic companies and domestic manufacturing companies is reduced to 15 per cent from the existing 18.50 per cent.
It is important to note that this is the third time when the income-tax rates for AY 2020-21 or FY 2019-20 have been changed.
The first time the rates of income-tax were changed by Interim Budget 2019 in February 2019 before the 2019 general election. The amendments were made by the Finance Act, 2019.
Then after the formation of the new government in the Centre, the full-fledged Union Budget 2019 was placed before the Parliament on 5th July 2019. The amendments were made by the Finance (No. 2) Act, 2019.
Then for the third time, the income tax rates were changed by Taxation Laws (Amendment) Ordinance, 2019 on 20th September 2019. The amendments were primarily carried out to provide the benefit of reduced income tax rates for domestic companies and domestic manufacturing companies.
This article is all about Taxation Laws (Amendment) Ordinance, 2019 and the amendments that this Ordinance has introduced.
On 20th September 2019, the Finance Minister Nirmala Sitaraman hold a press conference in Goa and proposes to slash corporate tax for domestic companies and new domestic manufacturing companies through an ordinance.
"We today proposes to slash the corporate tax rates for domestic companies and new domestic manufacturing companies," the Finance Minister said in the meeting. She further said that revenue forgone on reduction in corporate tax and other relief measures would be Rs. 1.45 lakh crore annually. She said this is being done to promote investment growth in the economy.
Thereafter, the Taxation Laws (Amendment) Ordinance, 2019 was promulgated.
In nutshell, the ordinance contains three chapters which are as follows-
Chapter-I: Preliminary
Chapter-II: Amendments in the Income Tax Act, 1961
Chapter-III: Amendments in the Finance (No. 2) Act, 2019
"We today proposes to slash the corporate tax rates for domestic companies and new domestic manufacturing companies," the Finance Minister said in the meeting. She further said that revenue forgone on reduction in corporate tax and other relief measures would be Rs. 1.45 lakh crore annually. She said this is being done to promote investment growth in the economy.
Thereafter, the Taxation Laws (Amendment) Ordinance, 2019 was promulgated.
In nutshell, the ordinance contains three chapters which are as follows-
Chapter-I: Preliminary
Chapter-II: Amendments in the Income Tax Act, 1961
Chapter-III: Amendments in the Finance (No. 2) Act, 2019
Summary of the Taxation Laws (Amendment) Ordinance, 2019:
1. These reduced rates of income taxes and other reliefs are applicable from AY 2020-21.
2. Amendments were carried out in the following sections-
Amendment in Income Tax Act, 1961
1) Amendments in section 92BA
2) Amendments in section 115BA
3) Insertion of new section 115BAA
4) Insertion of new section 115BAB
5) Amendments in section 115JB
6) Amendments in section 115QA
Amendment in Finance (No. 2) Act, 2019
1) Amendments in section 2
2) Amendments in Part-II and Paragraph A of Part-III of First Schedule
Salient features of the amendments:
Before we discuss and analyze the impact of amendments, the salient features of the amendments in the ordinance are highlighted below-
1. Government brings in Taxation Laws (Amendment) Ordinance, 2019 to make certain amendments in the Income-Tax Act, 1961 and the Finance (No. 2) Act, 2019 effective from Assessment Year (AY) 2020-21 (Financial Year 2019-20).
2. The new provision provides a domestic company with an option to pay income tax @ 22 per cent without claiming any specified exemption and deductions.
3. The new provision provides any domestic manufacturing company which is incorporated on or after 01.10.2019 but begins the production on or before 31.03.2023, an option to pay income tax @ 15 per cent without claiming any specified exemption and deductions.
4. An exit option has been given to those domestic companies which had opted to pay tax under section 115BA earlier.
5. The surcharge for section 115BAA and section 115BAB is at a flat rate of 10 per cent irrespective of the level of income.
6. Health and Education Cess on income-tax of 4 per cent shall continue to apply.
7. A domestic company is given the option to exercise the reduced rate of income-tax under section 115BAA and section 115BAB in any assessment year beginning from AY 2020-21. Till the option is exercised, a domestic company can continue to pay the income-tax rate at the pre-amended rate.
8. Once the reduced income-tax rate under the new provisions is exercised by a domestic company, it cannot be withdrawn later.
9. The provisions of Minimum Alternate Tax or MAT under section 115JB shall not apply to a domestic company availing the benefits of section 115BAA and 115BAB.
10. Higher rate of Surcharge, as introduced by Finance (No. 2) Act, 2019, shall not apply on Capital Gains arising from the sale of equity shares in a company, units of equity-oriented mutual funds and unit of a business trust liable for securities transaction tax in the hands of -
- Individuals,
- Hindu undivided family (HUF),
- association of persons or body of individuals, whether incorporated or not or every artificial juridical person
11. The increased Surcharge shall also not apply to capital gains on the sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs).
12. Relief is given to those listed companies which have made a public announcement of buy-back of shares before 5th July 2019 by withdrawing the income-tax on buy-back of shares.
The amendments in the Income Tax Act, 1961 are discussed below-
Amendment of Section 92BA:
Section 92BA of the Income Tax Act, 1961 has been amended to include any business transacted between the persons referred to in sub-section (4) of section 115BAB as 'specified domestic transaction'.
For this purpose, section 92BA is amended in the Taxation Laws (Amendment) Ordinance 2019 in the following manner-
2. In section 92BA of the Income-tax Act, 1961 (hereafter in this Chapter referred to as the Income-tax Act), after clause (v), the following clause shall be inserted with effect from the 1st day of April, 2020, namely:—
"(va) any business transacted between the persons referred to in sub-section (4) of section 115BAB;"
Amendment of Section 115BA:
Section 115BA was introduced as a beneficial provision to provide for a reduced rate of 25 per cent of income-tax rate for a domestic company without claiming any exemption/deduction and subject to fulfilment of certain other conditions specified therein. It was also specified that once the beneficial reduced rate of income-tax is opted by a domestic company, the same cannot be withdrawn subsequently.
With the amendment in the Taxation Laws (Amendment) Ordinance 2019, the heading for section 115BA is modified to 'domestic manufacturing company' from existing 'domestic company'. After the amendment, section 115BA thus reads as - 'Tax on income of certain domestic manufacturing companies'.
Since more beneficial provisions and reduced rates of income-tax are introduced in Taxation Laws (Amendment) Ordinance, 2019 by section 115BAA and section 115BAB, it has now become necessary to provide an exit window to those who had earlier opted the income-tax rate under section 115BA. Section 115BA is now modified to provide for an exit option to existing domestic companies which opted this section in any preceding previous year.
For this purpose, section 115BA is amended in the Taxation Laws (Amendment) Ordinance, 2019 in the following manner-
3. In section 115BA of the Income-tax Act with effect from the 1st day of April, 2020,-
(a) for the marginal heading "Tax on income of certain domestic companies", the marginal heading "Tax on income of certain domestic manufacturing companies" shall be substituted;
(b) in sub-section (1), for the words "subject to the other provisions of this Chapter", the words, figures and letters "subject to the other provisions of this Chapter, other than those mentioned under section 115BAA and section 115BAB" shall be substituted;
(c) in sub-section (4), after the proviso, the following proviso shall be inserted, namely:—
"Provided further that where the person exercises option under section 115BAB, the option under this section may be withdrawn.".
It may be noted that section 115BA was introduced in the law by Finance Act, 2016 w.e.f. 01.04.2017. Since section 115BAA is more beneficial than section 115BA, the section lost its shine within three years of its introduction.
Introduction of a new section 115BAA:
This is the most vibrant provision of the Taxation Laws (Amendment) Ordinance 2019.
The salient features of section 115BAA are discussed below-
A new section 115BAA is introduced from the Assessment Year 2020-21 which provides an option to a domestic company to pay tax at a lower rate of 22% as against the normal tax rate of 30% or 25% and MAT u/s 115JB.
1. Applicability: Section 115BAA is applicable from Assessment Year 2020-21 (Financial Year 2019-20).
2. Availability: Section 115BAA is applicable to a domestic company only. It is not available to other forms of business organization like firms, LLP, Individuals, even a foreign company, etc.
3. Rate of Tax: Section 115BAA provides an option to a domestic company to pay tax at a lower rate of 22% (plus applicable surcharge and cess).
4. Optional: Section 115BAA is optional. A domestic company may choose not to pay tax under this section if pre-amendment rates are beneficial to it. It should be remembered that it is not mandatory to opt for the new section from AY 2020-21. It can opt for the new provision in any subsequent assessment year beginning from AY 2020-21. One should weigh the benefits available in the existing regime before moving to the new regime of taxation.
5. Conditions: The reduced rate of income-tax under section 115BAA comes with certain conditions. Such conditions will apply to a domestic company opting section 115BAA. These conditions are related to the computation of the 'Total Income' of the domestic company.
As per section 115BAA, the total income shall be computed-
a) without claiming any deduction
- u/s 10AA (Units established in Special Economic Zones),
- u/s 32(1)(iia) (Additional Depreciation on new plant and machinery),
- u/s 32AD (Investment in new plant or machinery in notified backward areas in certain States)
- u/s 33AB (Tea development account, coffee development account and rubber development account)
- u/s 33ABA (Site Restoration Fund)
- u/s 35(1)(ii)/(iia)(iii), 35(2AA), 35(2AB) (Weighted deduction for scientific research, etc.)
- u/s 35AD (Deduction in respect of expenditure on specified business)
- u/s 35CCC (Expenditure on agricultural extension project)
- u/s 35CCD (Expenditure on skill development project)
- Under Chapter VI-A under the heading "C" except section 80JJAA. It covers sections 80H to 80TT.
- Section 80G falls under the heading "B" of Chapter-VI-A and thus the same is available.
b) without set-off of any brought forward loss of earlier years to the extent such loss relates to deductions mentioned above. Such losses would also not be allowed to be carried forward to subsequent years. Other brought forward business loss and unabsorbed depreciation is allowed to be set-off.
c) after claiming normal depreciation other than additional depreciation u/s 32(1)(iia).
The benefit of lower rate under the aforesaid section can be exercised by the company from any year commencing from AY 2020-21 or onwards. It may be exercised even after AY 2020-21 after the benefits under the pre-amended laws are exhausted. Such an option is to be exercised in a prescribed manner, before the due date of return u/s 139(1) for the year in which option is exercised.c) after claiming normal depreciation other than additional depreciation u/s 32(1)(iia).
Therefore it is mandatory to file the return in time within the due date to exercise the option under the new provision.
The option once exercised would be binding for subsequent years and cannot be withdrawn.
The new section 115BAA as introduced by the Taxation Laws (Amendment) Ordinance, 2019 is contained in clause 4 of the said Ordinance and is reproduced below-
4. After section 115BA of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of April, 2020, namely:—
"115BAA. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAB, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of twenty-two per cent., if the conditions contained in sub-section (2) are satisfied.
(2) For the purposes of sub-section (1), the following conditions shall apply subject to the condition that the total income of the company has been computed,—
(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VT-A under the heading "C.—Deductions in respect of certain incomes" other than the provisions of section 80JJAA;
(ii) without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i); and
(iii) by claiming the depreciation, if any, under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.
(3) The loss referred to in sub-clause (ii) of sub-section (2) shall be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year.
(4) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under subsection (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:
Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.
Surcharge in respect of income chargeable to tax under section 115BAA is prescribed at a flat rate of 10%.
Introduction of a new section 115BAB:
New lower tax rate of income-tax introduced for domestic manufacturing companies by the Taxation Laws (Amendment) Ordinance 2019.
The salient features of section 115BAB are discussed below-
New section 115BAB is introduced from the assessment year 2020-21 which provides an option to a domestic manufacturing company to pay tax at a lower rate of 15% if such a company is incorporated on or after 1st October 2019 and commences manufacturing within 31st March 2023 and satisfies certain other conditions.
Surcharge in respect of income chargeable to tax under section 115BAB is prescribed at a flat rate of 10%.
1. Applicability: Section 115BAB is applicable from Assessment Year 2020-21 (Financial Year 2019-20).
2. Availability: Section 115BAB is applicable to a new domestic manufacturing company only. It is not available to other forms of business organization like firms, LLP, Individuals, even a foreign company, etc.
3. Rate of Tax: Section 115BAB provides an option to a new domestic manufacturing company to pay tax at a lower rate of 15% (plus applicable surcharge and cess).
4. Optional: Section 115BAB is optional. A new domestic manufacturing company may choose not to pay tax under this section if pre-amendment rates are beneficial to it. It should be remembered that it is not mandatory to opt for the new section from AY 2020-21. It can opt for the new provision in any subsequent assessment year beginning from AY 2020-21. One should weigh the benefits available in the existing regime before moving to the new regime of taxation.
5. Conditions: The reduced rate of income-tax under section 115BAB comes with certain conditions. Such conditions will apply to a new domestic manufacturing company opting section 115BAB.
Section 115BAB can be opted by a domestic company if -
a) the company has been set-up and registered on or after the 1st day of October 2019, and has commenced manufacturing on or before the 31st day of March 2023 and,
b) is not formed by splitting up, or the reconstruction, of a business already in existence. However, an existing business if discontinued and revived within the period specified under section 33B is eligible to claim the benefit of the new reduced income-tax rate under this section. Section 33B covers situations like a flood, typhoon, hurricane, cyclone, earthquake, riot or civil disturbance, accidental fire or explosion, action by an enemy, etc.
c) does not use any machinery or plant previously used for any purpose.
This means no second-hand machinery can be used for setting up the new manufacturing unit. Moreover, it is not necessary that the machinery was used previously in India for business purpose only. Even if the machinery was used previously in India for non-business purpose, the same will be treated as second-hand machinery.
The only exception is given to imported plant and machinery. If second-hand machinery is imported into India for the first time, it will be considered as new machinery.
Previously used machinery or second-hand machinery can be used or installed in the new manufacturing unit if the total value of such machinery or plant or part thereof does not exceed twenty per cent. of the total value of the machinery or plant used by the company. Thus the new manufacturing unit can use second-hand plant and machinery only to the extent of 20 per cent of total cost of installed plant and machinery.
d) does not use any building previously used as a hotel or a convention centre. In other words, the new manufacturing company must not use the building previously as a hotel or a convention centre.
e) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it
These conditions related to the computation of the 'Total Income' of such a company are given below-
As per section 115BAB, the total income shall be computed-
a) without claiming any deduction
2. Availability: Section 115BAB is applicable to a new domestic manufacturing company only. It is not available to other forms of business organization like firms, LLP, Individuals, even a foreign company, etc.
3. Rate of Tax: Section 115BAB provides an option to a new domestic manufacturing company to pay tax at a lower rate of 15% (plus applicable surcharge and cess).
4. Optional: Section 115BAB is optional. A new domestic manufacturing company may choose not to pay tax under this section if pre-amendment rates are beneficial to it. It should be remembered that it is not mandatory to opt for the new section from AY 2020-21. It can opt for the new provision in any subsequent assessment year beginning from AY 2020-21. One should weigh the benefits available in the existing regime before moving to the new regime of taxation.
5. Conditions: The reduced rate of income-tax under section 115BAB comes with certain conditions. Such conditions will apply to a new domestic manufacturing company opting section 115BAB.
Section 115BAB can be opted by a domestic company if -
a) the company has been set-up and registered on or after the 1st day of October 2019, and has commenced manufacturing on or before the 31st day of March 2023 and,
b) is not formed by splitting up, or the reconstruction, of a business already in existence. However, an existing business if discontinued and revived within the period specified under section 33B is eligible to claim the benefit of the new reduced income-tax rate under this section. Section 33B covers situations like a flood, typhoon, hurricane, cyclone, earthquake, riot or civil disturbance, accidental fire or explosion, action by an enemy, etc.
c) does not use any machinery or plant previously used for any purpose.
This means no second-hand machinery can be used for setting up the new manufacturing unit. Moreover, it is not necessary that the machinery was used previously in India for business purpose only. Even if the machinery was used previously in India for non-business purpose, the same will be treated as second-hand machinery.
The only exception is given to imported plant and machinery. If second-hand machinery is imported into India for the first time, it will be considered as new machinery.
Previously used machinery or second-hand machinery can be used or installed in the new manufacturing unit if the total value of such machinery or plant or part thereof does not exceed twenty per cent. of the total value of the machinery or plant used by the company. Thus the new manufacturing unit can use second-hand plant and machinery only to the extent of 20 per cent of total cost of installed plant and machinery.
d) does not use any building previously used as a hotel or a convention centre. In other words, the new manufacturing company must not use the building previously as a hotel or a convention centre.
e) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it
These conditions related to the computation of the 'Total Income' of such a company are given below-
As per section 115BAB, the total income shall be computed-
a) without claiming any deduction
- u/s 10AA (Units established in Special Economic Zones),
- u/s 32(1)(iia) (Additional Depreciation on new plant and machinery),
- u/s 32AD (Investment in new plant or machinery in notified backward areas in certain States)
- u/s 33AB (Tea development account, coffee development account and rubber development account)
- u/s 33ABA (Site Restoration Fund)
- u/s 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB) (Weighted deduction for scientific research, etc.)
- u/s 35AD (Deduction in respect of expenditure on specified business)
- u/s 35CCC (Expenditure on agricultural extension project)
- u/s 35CCD (Expenditure on skill development project)
- Under Chapter VI-A under the heading "C" except section 80JJAA. It covers sections 80H to 80TT.
- Section 80G falls under the heading "B" of Chapter-VI-A and thus the same is available.
b) without set-off of any brought forward loss of earlier years to the extent such loss relates to deductions mentioned above. Such losses would also not be allowed to be carried forward to subsequent years. Other brought forward business loss and unabsorbed depreciation is allowed to be set-off.
c) after claiming normal depreciation other than additional depreciation u/s 32(1)(iia).
The benefit of lower rate under the aforesaid section can be exercised by the company from any year commencing from AY 2020-21 or onwards. It may be exercised even after AY 2020-21 after the benefits under the pre-amended laws are exhausted. Such an option is to be exercised in a prescribed manner, before the due date of return u/s 139(1) for the year in which option is exercised. c) after claiming normal depreciation other than additional depreciation u/s 32(1)(iia).
Therefore it is mandatory to file the return in time within the due date to exercise the option under the new provision.
The option under section 115BAB once exercised would be binding for subsequent years and cannot be withdrawn.
The new section 115BAB as introduced by the Taxation Laws (Amendment) Ordinance, 2019 is also contained in clause 4 of the said Ordinance and reads as follows-
115BAB. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAA, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of fifteen per cent., if the conditions contained in sub-section (2) are satisfied.
(2) For the purposes of sub-section (1), the following conditions shall apply, namely:—
(a) the company has been set-up and registered on or after the 1st day of October, 2019, and has commenced manufacturing on or before the 31st day of March, 2023, and,—
(a) the company has been set-up and registered on or after the 1st day of October, 2019, and has commenced manufacturing on or before the 31st day of March, 2023, and,—
(i) is not formed by splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the person of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in the said section;
(ii) does not use any machinery or plant previously used for any purpose.
Explanation 1.—For the purposes of sub-clause (ii), any machinery or plant which was used outside India by any other person shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:—
(A) such machinery or plant was not, at any time previous to the date of the installation by the person, used in India;
(B) such machinery or plant is imported into India from any country outside India; and
(C) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the person.
Explanation 2.—Where in the case of a person, any machinery or plant or any part thereof previously used for any purpose is put to use by the company and the total value of such machinery or plant or part thereof does not exceed twenty per cent. of the total value of the machinery or plant used by the company, then, for the purposes of sub-clause (ii) of this clause, the condition specified therein shall be deemed to have been complied with;
(iii) does not use any building previously used as a hotel or a convention centre, as the case may be.
Explanation. —For the purposes of this sub-clause, the expressions "convention centre" and "hotel" shall have the meanings respectively assigned to them in clause (a) and clause (b) of subsection (6) of section 80-ID;
(b) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and
(c) the total income of the company has been computed,—
(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading "C.—Deductions in respect of certain incomes" other than the provisions of section 8 OJJAA ;
(ii) without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i); and
(iii) by claiming the depreciation under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.
(3) The loss referred to in sub-clause (ii) of clause (c) of sub-section (2) shall be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year.
(4) Where it appears to the Assessing Officer that, owing to the close connection between the company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the company more than the ordinary profits which might be expected to arise, the Assessing Officer shall, in computing the profits and gains of such company for the purposes of this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:
Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F.
(5) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under subsection (1) of section 139 for furnishing the first of the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:
Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.
Though the conditions for computation of income and the option to exercise the provisions of this section are similar to those of section 115BAA, however, Sub-section (4) of section 115BAB empowers the assessing officer to determine reasonable profits of such domestic manufacturing company, if such company has business arrangements or enters into transaction with connected parties in a manner that it produces more than ordinary profits.
Domestic transfer pricing provisions contained in section 92BA have been made applicable to transactions of eligible companies with connected parties.
This provision is similar to provisions of section 80IA(10).
Amendment of Section 115JB:
Further, the provisions of section 115JB or MAT shall not apply to any income accruing or arising to a company from the life insurance business referred to in section 115B.
Further, if a domestic company does not opt to pay tax under sections 115BAA or 115BAB and continue the existing or pre-amended tax rate @ 30 per cent or @ 25 per cent the provisions of section 115JB shall apply to such domestic companies. However, the tax rate on 'Book Profit' under section 115JB is reduced to 15 per cent from the existing 18.50 per cent from AY 2020-21.
For this purpose, section 115JB is amended in the Taxation Laws (Amendment) Ordinance, 2019 in the following manner-
5. In section 115JB of the Income-tax Act, with effect from the 1st day of April, 2020,—
(a) in sub-section (1), the following proviso shall be inserted, namely:—
"Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words "eighteen and one-half per cent.", occurring at both the places, the words "fifteen per cent." had been substituted.";
(b) for sub-section (5A), the following sub-section shall be substituted, namely:—
"(5A) The provisions of this section shall not apply to,—
(i) any income accruing or arising to a company from life insurance business referred to in section 115B;
(ii) a person who has exercised the option referred to under section 115BAA or section 115BAB.".
Amendment of Section 115QA:
It is to be noted that the Finance (No.2) Act, 2019 was tabled on Parliament in the Loksabha by the Finance Minister Nirmala Sitaraman on 5th July 2019. The amendment was made effective from the even day.
Thus the amendment was covering those buy-back of shares by a listed company that was announced before 5th July 2019 when the law was not applicable to them.
To mitigate the undue hardships to those companies due to change in law, an amendment is made in the Taxation Laws (Amendment) Ordinance 2019 to exclude those buy-back of listed shares by a listed domestic company which was publicly announced before 5th July 2019.
Henceforth, the provisions of section 115QA shall apply to buy-back of listed shares by a listed domestic company which is announced on or after the 5th day of July 2019.
For this purpose, section 115QA is amended in the Taxation Laws (Amendment) Ordinance 2019 vide clause 6 in the following manner-
6. In section 115QA of the Income-tax Act, in sub-section (1), the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 5th day of July, 2019, namely:—
"Provided that the provisions of this sub-section shall not apply to such buy-back of shares (being the shares listed on a recognised stock exchange), in respect of which public announcement has been made before 5th day of July, 2019 in accordance with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992 as amended from time to time.".
Amendment in Finance (No. 2) Act, 2019
Amendments in the Finance (No. 2) Act, 2019 is contained in Chapter-III of the Taxation Laws (Amendment) Ordinance 2019 and has two clauses - Clause 7 and Clause 8.
Primarily, the amendments in the Finance (No. 2) Act, 2019 are in relation to 'Surcharge on Income-Tax' on Short Term Capital Gains u/s 111A and Long Term Capital Gains u/s 112A. Section 111A deals with Short Term Capital Gain (income) arising from the transfer of equity shares and section 112A deals with Long Term Capital Gains from the transfer of equity shares.
Recently, in the Union Budget 2019 on 5th July 2019, the surcharge on income tax was increased to 25 per cent, where the total income exceeds Rs. 2.0 crore but does not exceed Rs. 5.0 crore and 37 per cent where the total income exceeds Rs. 5.0 crore. With these amendments in Finance (No. 2) Act, 2019, the increased surcharge of income-tax is rolled back by the government within two and half months of its introduction.
In order to keep the article simple, the provisions of Finance (No. 2) Act, 2019 are not reproduced here but the amendments are discussed.
The amendments in the Finance (No. 2) Act, 2019 by Taxation Laws (Amendment) Ordinance, 2019 are reproduced below-
Clause 7 of the Ordinance deals with the surcharge on income-tax for income under section 115AD.
Section 115AD deals with 'Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer'.
Section 115AD(1) charges the following two types of income of a Foreign Institutional Investor—
Section 115AD(1)(a): It includes income other than income by way of dividends referred to in section 115-O received in respect of securities (other than units referred to in section 115AB).
Section 115AD(1)(b): It includes income by way of short-term or long-term capital gains arising from the transfer of such securities.
7. In section 2 of the Finance (No.2) Act, 2019 [hereafter in this Chapter referred to as the Finance (No.2) Act], in subsection (9), with effect from the 1st day of April, 2019,—
(a) in third proviso,—
(i) in clause (a) for the words "the Income-tax Act", the words, figures and letters "the Income-tax Act, not having any income under section 115AD of the Income-tax Act" shall be inserted and shall be deemed to have been inserted;
(ii) after clause (a), the following clause shall be inserted and shall be deemed to have been inserted, namely:—
(aa) in the case of every association of persons or body of individuals, whether incorporated or not, having income under section 115AD of the Income-tax Act,—
(i) at the rate of ten per cent. of such "advance tax", where the total income exceeds fifty lakh rupees, but does not exceed one crore rupees;
at the rate of fifteen per cent. of such "advance tax", where the total income exceeds one crore rupees but does not exceed two crore rupees;
(iii) at the rate of twenty five per cent. of such "advance tax", where the total income [excluding the income of the nature referred to in clause (b) of sub-section (1) of section 115AD of the Income-tax Act] exceeds two crore rupees but does not exceed five crore rupees;
(iv) at the rate of thirty-seven per cent. of such "advance tax", where the total income [excluding the income of the nature referred to in clause (b) of sub-section (1) of section 115AD of the Income-tax Act] exceeds five crore rupees;
(v) at the rate of fifteen per cent. of such "advance tax", where the total income [including the income of the nature referred to in clause (b) of sub-section (1) of section 115AD of the Income-tax Act] exceeds two crore rupees but is not covered in sub-clauses (iii) and (iv):
Provided that in case where the total income includes any income chargeable under clause (b) of sub-section (1) of section 115AD of the Income-tax Act, the rate of surcharge on the advance tax computed on that part of income shall not exceed fifteen per cent.;';
(b) in the fourth proviso, for the words, brackets and letter "in (a) above", the words, brackets and letters "in (a) and (aa) above" shall be substituted;
(c) after the eighth proviso, the following proviso shall be inserted, namely:—
"Provided also that in respect of any income chargeable to tax under section 115BAA or section 115BAB of the Income-tax Act, the tax computed under the first proviso shall be increased by a surcharge, for the purposes of the Union, calculated at the rate of ten per cent. of such "advance tax".
With this amendment, the surcharge on income tax for Individuals, HUF and Artificial Juridical Person in respect of income under section 115AD is abolished from AY 2020-21.
After the amendment, only Association of Persons and Body of Individuals, whether incorporated or not, shall be required to pay the surcharge on income tax in respect of income chargeable u/s 115AD. However, in case of income is chargeable u/s 115AD(1)(b), the maximum rate of surcharge on income tax is capped at 15 per cent.
The surcharge on income-tax for Association of Persons and Body of Individuals, whether incorporated or not, in respect of income mentioned under section 115AD(1)(a) is as follows:
Level of Income
|
Rate of Surcharge on
Income-tax
|
If total income is up to Rs. 50 Lakh
|
Nil
|
If total income is more than Rs. 50 Lakh but up to Rs. 1.0 crore
|
10%
|
If total income is more than Rs. 1.0 crore but up to Rs. 2.0 crore
|
15%
|
If total income is more than Rs. 2.0 crore but up to Rs. 5.0 crore
|
25%
|
If total income is more than Rs. 5.0 crore
|
37%
|
The surcharge on income-tax for Association of Persons and Body of Individuals, whether incorporated or not, in respect of income mentioned under section 115AD(1)(b) is as follows:
Level of Income
|
Rate of Surcharge on
Income-tax
|
If total income is upto Rs. 50 Lakh
|
Nil
|
If total income is more than Rs. 50 Lakh but up to Rs. 1.0 crore
|
10%
|
If total income is more than Rs. 1.0 crore but up to Rs. 2.0 crore
|
15%
|
If total income is more than Rs. 2.0 crore but up to Rs. 5.0 crore
|
15%
|
If total income is more than Rs. 5.0 crore
|
15%
|
Surcharge on income-tax chargeable under section 115BAA and section 115BAB is 10 per cent irrespective of the level of income.
Thus a domestic company or a domestic manufacturing company is liable to pay the surcharge at a flat rate of 10 per cent if it opts for section 115BAA or section 115BAB in contrast to 7 per cent (if total income is more than Rs. 1.0 crore but up to Rs. 10.0 crore) or 12 per cent (If total income is more than Rs. 10.0 crore) under normal provisions of tax for a domestic company.
Clause 8(A) of the Taxation Laws (Amendment) Ordinance 2019 deals with surcharge on income tax (or rate of TDS) on payments to a non-resident being an individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not or every artificial juridical person in the nature of income chargeable to tax u/s 111A and u/s 112A.
Clause 8(A) of the Ordinance reads as follows-
8. In the First Schedule of the Finance (No.2) Act, with effect from the 1st day of April, 2019,—
(A) in PART II, under the sub-heading "Surcharge on income-tax", in paragraph (i), in clause (a),----
(i) in sub-clauses I and II, after the words "aggregate of such incomes", the brackets, figures and letters "(including the income under the provisions of section 111A and section 112A of the Income-tax Act)" shall be inserted and shall be deemed to have been inserted;
(ii) in sub-clauses III and IV, after the words "aggregate of such incomes" the brackets, figures and letters "(excluding the income under the provisions of section 111A and section 112A of the Income-tax Act)" shall be inserted and shall be deemed to have been inserted.
(iii) after sub-clause IV, the following sub-clause shall be inserted and shall be deemed to have been inserted, namely:—
"V. at the rate of fifteen per cent. of such tax, where the income or aggregate of such incomes (including the income under the provisions of section 111A and section 112A of the Income-tax Act) paid or likely to be paid and subject to the deduction exceeds two crore rupees, but is not covered under sub-clauses III and IV):
Provided that in case where the total income includes any income chargeable under section 111A and section 112A of the Income-tax Act, the rate of surcharge on the amount of income-tax deducted in respect of that part of income shall not exceed fifteen per cent.;';
This clause is related to Surcharge on income tax by way of TDS on payments to a non-resident being an individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not or every artificial juridical person and the payment is made for income chargeable to tax u/s 111A and 112A.
Surcharge on income tax by way of TDS in respect of income chargeable to tax u/s 111A and 112A shall not exceed 15 per cent. Thus the increased rate of surcharge of 25 per cent and 37 per cent shall not apply to Short Term Capital Gain chargeable u/s 111A and Long Term Capital Gain chargeable to income tax u/s 112A.
The amended surcharge on income tax (rate of TDS) for income u/s 111A or 112A is tabulated below-
Amount of payment
|
Rate of Surcharge on
Income-tax
|
If total income is up to Rs. 50 Lakh
|
Nil
|
If total income is more than Rs. 50 Lakh but up to Rs. 1.0 crore
|
10%
|
If total income is more than Rs. 1.0 crore but up to Rs. 2.0 crore
|
15%
|
If total income is more than Rs. 2.0 crore but up to Rs. 5.0 crore
|
15%
|
If total income is more than Rs. 5.0 crore
|
15%
|
Remember the reduced rate of surcharge on income tax is applicable only to income chargeable to tax u/s 111A and 112A. For other nature of income, there is no change and the increased surcharge as per Finance (No. 2) Act, 2019 will apply.
Further, the amendment is applicable only for an individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not or every artificial juridical person.
For a foreign company, there is no change in the rate of surcharge since the same was not increased by the Finance (No.2) Act, 2019.
Clause 8(B) of the ordinance deals with surcharge on income tax on the total income in the nature of income chargeable to tax u/s 111A and u/s 112A of an individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not or every artificial juridical person .
Clause 8(B) of the Ordinance reads as follows-
(B) in PART III, in Paragraph A, under the sub-heading "Surcharge on income-tax", after the opening portion,—
(i) in clauses (a) and (b), after the words "having a total income", the brackets, words, figures and letters "(including the income under the provisions of section 111 A and section 112A)" shall be inserted;
(ii) in clauses (c) and (d), after the words "having a total income", the brackets, words, figures and letters "(excluding the income under the provisions of section 111A and section 112A)" shall be inserted;
after clause (d) and before the proviso, the following clause shall be inserted, namely:
"(e) having a total income (including the income under the provisions of section 111A and section 112A) exceeding two crore rupees, but is not covered under clauses (c) and (d), shall be applicable at the rate of fifteen per cent. of such income-tax:
Provided that in case where the total income includes any income chargeable under section 111A and section 112A of the Income-tax Act, the rate of surcharge on the amount of income-tax computed on that part of income shall not exceed fifteen per cent.;';
This clause has amended the surcharge on income-tax for individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person and its scope is limited to income chargeable to tax u/s 111A and 112A. The maximum rate of surcharge on income-tax in the nature of income chargeable to tax under section 111A or section 112A is capped at 15 per cent.
Surcharge on income tax in respect of income chargeable to tax u/s 111A and 112A shall not exceed 15 per cent. Thus the increased rate of surcharge of 25 per cent and 37 per cent shall not apply to Short Term Capital Gain chargeable u/s 111A and Long Term Capital Gain chargeable to income tax u/s 112A.
The amended surcharge on income tax for income u/s 111A or 112A for individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person is tabulated below-
Amount of payment
|
Rate of Surcharge on Income-tax
|
If total income is up to Rs. 50 Lakh
|
Nil
|
If total income is more than Rs. 50 Lakh but up to Rs. 1.0 crore
|
10%
|
If total income is more than Rs. 1.0 crore but up to Rs. 2.0 crore
|
15%
|
If total income is more than Rs. 2.0 crore but up to Rs. 5.0 crore
|
15%
|
If total income is more than Rs. 5.0 crore
|
15%
|
Remember the reduced rate of surcharge on income tax is applicable only to income chargeable to tax u/s 111A and 112A. For other nature of income, there is no change and the increased surcharge as per Finance (No. 2) Act, 2019 will apply.
Further, the amendment is applicable only for an individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not or every artificial juridical person.
The rate of the surcharge as amended in the Ordinance shall apply from AY 2020-21 in all the cases mentioned above.
Illustrations
Illustrations for understanding the concept of new income tax rates for domestic companies under section 115BAA and section 115BAB.Illustration 1:
A domestic company has the following information as per ITR of AY 2018-19:
Particulars
|
Amount
(Rs.)
|
Profit
before tax
|
5.0
|
Add: Contribution
to approved Institution u/s 35(1)(ii)
|
50.0
|
55.0
|
|
Less: Contribution
to approved Institution u/s 35(1)(ii) @ 150%
|
(-)75.0
|
(-)20.0
|
|
Add:
Depreciation as per Books
|
10.0
|
(-)10.0
|
|
Less:
Depreciation as per IT
|
-90.0
|
Income/Loss under the head ‘Income from Business’
|
(-)100.0
|
The brought forward business loss is Rs. 100 out of which Rs. 90 is unabsorbed depreciation and balance Rs. 10 is Business Loss.
The company is opting section 115BAA in AY 2020-21. Thus it thas to restate its brought forward business loss to exclude loss attributable to section 35(1)(ii).
The revised brought forward loss is computed as below-
Particulars
|
Amount
(Rs.)
|
Profit
before tax
|
5.0
|
Add: Contribution
to approved Institution u/s 35(1)(ii)
|
50.0
|
55.0
|
|
Less: Contribution
to approved Institution u/s 35(1)(ii) @ 150%
|
0.0
|
55.0
|
|
Add:
Depreciation as per Books
|
10.0
|
65.00
|
|
Less:
Depreciation as per IT
|
-90.0
|
Revised Income/Loss under the head ‘Income from Business’
|
(-)25.0
|
The revised brought forward business loss comes to Rs. 25.0 which is unabsorbed depreciation. In AY 2020-21, the company can set-off only Rs. 25 from its income.
Illustration 2:
A domestic company has the following information as per ITR of AY 2018-19:
Particulars
|
Amount
(Rs.)
|
Profit
before tax
|
5.0
|
Less:
Profit on sale of assets (u/s 50)
|
(-)130.0
|
(-)125.0
|
|
Add: Contribution
to approved Institution u/s 35(1)(ii)
|
50.0
|
(-)75.0
|
|
Less: Contribution
to approved Institution u/s 35(1)(ii) @ 150%
|
(-)75.0
|
(-)150.0
|
|
Add:
Depreciation as per Books
|
10.0
|
(-)140.0
|
|
Less:
Depreciation as per IT
|
-90.0
|
Income/Loss under the head ‘Income from Business’
|
(-)230.0
|
The brought forward business loss is Rs. 230 out of which Rs. 90 is unabsorbed depreciation and balance Rs. 140 is Business Loss.
The company is opting section 115BAA in AY 2020-21. Thus it thas to restate its brought forward business loss to exclude loss attributable to section 35(1)(ii).
The revised brought forward loss is computed as below-
Particulars
|
Amount
(Rs.)
|
Profit
before tax
|
5.0
|
Less:
Profit on sale of assets (u/s 50)
|
(-)130.0
|
(-)125.0
|
|
Add: Contribution
to approved Institution u/s 35(1)(ii)
|
50.0
|
(-)75.0
|
|
Less: Contribution
to approved Institution u/s 35(1)(ii) @ 150%
|
0.0
|
(-)75.0
|
|
Add:
Depreciation as per Books
|
10.0
|
(-)65.0
|
|
Less:
Depreciation as per IT
|
-90.0
|
Income/Loss under the head ‘Income from Business’
|
(-)155.0
|
The revised brought forward business loss comes to Rs. 155.0 out of which Rs. 90 is unabsorbed depreciation and Rs. 65 is business loss excluding deduction u/s 35(1)(ii). In AY 2020-21, the company can set-off brought forward business loss of Rs. 65 from its business income.
Illustration 3:
Some of the cases to make a suitable decision on switching to the new income tax rate or remaining in the old tax regime are given below. There may be some other cases also. Further, the cases are decided on the basis of the rate of tax only. The decision in the given cases may reverse due to change in the quantum of income. Thus one should carefully analyse the impact of the quantum also.
Cases
|
Income under normal Provisions
|
Book Profit u/s 115JB
|
Decision
(Only
on rate basis, quantum analysis should also be made)
|
Case-I
|
Loss
|
Profit
|
Its
better to remain in Old regime of tax.
|
Case-II
|
Loss
|
Profit
|
Its
better to switch new income tax rate.
|
Case-III
|
Profit
|
Profit
|
Its
better to switch new income tax rate.
|
Case-IV
|
Profit
|
Loss
|
Its
better to switch new income tax rate.
|
Case-V
|
Profit
(b/f
business loss available)
|
Profit
|
Its
better to switch new income tax rate.
|
Case-VI
|
Profit
|
Profit
(MAT
credit available)
|
Its
better to remain in Old regime of tax.
|
In Case-I, since no tax is payable, even under MAT, so it is better to remain in the old tax regime.
In Case-II, under old tax regime, MAT @ 15 per cent is payable whereas there is no tax under normal provisions. In new income-tax rate, since the provisions of MAT will not apply there will be no tax liability. Hence, switching to the new income-tax rate regime appears beneficial.
In Case-III, under old tax regime, MAT @ 15 per cent is payable whereas there is 25 per cent (or 30 per cent) tax under normal provisions. In the new income-tax rate regime, the provisions of MAT will not apply and the new income tax rate of 22 per cent will apply which will be more beneficial. Hence, switching to the new income-tax rate regime appears beneficial.
In Case-IV, though there will be no MAT, however, the old rate of tax is 25 per cent (or 30 per cent) under normal provisions. In the new income-tax rate regime, the rate of tax is 22 per cent only.
In Case-V, after adjusting the brought forward business loss, the income will be reduced to nil. There will be no tax under the old as well as the new tax regime but MAT @ 15 per cent will apply in case of the old tax regime. Thus it is better to switch to the new income-tax rate regime.
In Case-VI, after adjusting the accumulated MAT credit, the effective rate of income tax will come down to 15 per cent as compared to 22 per cent under the new tax regime. Thus it is better to remain in the old income-tax rate regime instead of switching to the new income-tax rate regime.
Press conference of the Finance Minister
In the end, the press conference of the Finance Minister Nirmala Sitaraman is given here.Also Read:
Press Release of Government on reduced Corporate tax rates under section 115BAA
CBDT Circular on Section 115BBA on MAT Credit and Additional Depreciation
Income Tax Slab for AY 2020-21 Update after Union Budget 2019
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