Detailed Industry Reaction on Nirmala Sithraman’s New Corporate Tax Structure

In order to promote growth and investment, a new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income-tax at the rate of 22% subject to condition that they will not avail any exemption/incentive. The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax.

This is a welcome move as it will reduce the outflow to the companies and they can spend more on capacity expansion as well as on modernization leading into demand for the capital goods and increase in the GDP.

Companies have to do a cost benefit analysis either to avail the lower income tax rate or avail the various incentives /exemptions. This is one way of providing a level playing field for all the companies.

In order to attract fresh investment in manufacturing and thereby provide boost to ‘Make-in-India’ initiative of the Government, another new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%. This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March, 2023. The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess.  Also, such companies shall not be required to pay Minimum Alternate Tax.

It give a flip to the manufacturing industry which in turn helps the manufacturing sector to contribute to the GDP. An increase in the manufacturing activity means more employment and demand for the capital goods, steel, cement etc., which in turn will improve the GDP by putting the economy on the trajectory path

This will really attract companies which are planning to move out of China due the trade war between US and China

A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period. After the exercise of the option they shall be liable to pay tax at the rate of 22% and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5% to 15%.

This provides a clear vision for the corporates and also helps in planning as the future is crystal clear.

In order to stabilise the flow of funds into the capital market, it is provided that enhanced surcharge introduced by the Finance (No.2) Act, 2019 shall not apply on capital gains arising on sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, HUF, AOP, BOI and AJP.

This will really boost the investment sentiments and also ensure that more money is brought in the capital markets. This  means that more capital can be raised by the companies which can be canalized to the market through capacity expansion or new units. This in turn will improve the employment opportunities which in turn increase the spending limits and pushes the growth.

In order to provide relief to listed companies which have already made a public announcement of buy-back before 5th July 2019, it is provided that tax on buy-back of shares in case of such companies shall not be charged.

This is good move and help then promoters to consolidate their holding in the company.

The Government has also decided to expand the scope of CSR 2 percent spending. Now CSR 2% fund can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government, and, making contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices  of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs

Allowing the CSR expenditure towards incubators funded by various agencies will really give a tremendous push to the start ups. The funding for the incubation centers as part of the CSR funds has seen a down trend in the recent years, which was Rs 26.54 crs in 2015-16 has come down to Rs 14.55 in 2017 – 18.