The Taxation Laws (Amendment) Bill, 2019

In Continuation to our blog on Changes in Corporate Tax Rate, We have clarification on some Points. 

The Taxation Laws (Amendment) Bill, 2019 was passed by the Lok Sabha on December 2, 2019 to replace the ordinance promulgated in September. This ordinance provided for significant tax cuts for domestic companies (Sec. 115BAA & Sec. 115BAB).
While the broad framework of the headline corporate tax rate cuts for the newly set-up manufacturing companies (15 per cent) remains unchanged subject to following Conditions:

  1. Set-off of losses and  under section 72A of the Act (relating to amalgamation) shall not be available to new manufacturing domestic companies that are formed by amalgamation.
  2. Clarification inserted for certain businesses that shall not be treated as business of manufacture or production of article or thing. Business’ such as: Development of computer software in any form or in any media, Mining, Conversion of marble blocks or similar items into slabs, Bottling of gas into cylinder, Printing of books or production of cinematograph films, Any other business notified by the Indian Government in this behalf.
  3. Should not use any building previously used as a hotel or a convention centre, as the case maybe, for which deduction under section 80ID of the Act has been claimed and allowed.
  4. The “business” is not formed by the splitting up, or the reconstruction, of a business already in existence.

Corporate tax rate cuts for the domestic companies (22 per cent) remains unchged subject to following Conditions:

  1. In case of an assessee opting to provision to sec 115BAA or Sec. 115BAB, all other deduction under Chapter VI-A will be not be allowed except to Sec. 80JJAA deduction on employment & 80LA of IT Act. This means, this deduction will continue even in case of those assessee  who is opting for lower tax U/s 115BAA & Sec 115BAB.
  2. Sec. 10AA is also not available for the companies opting to provision to sec 115BAA or Sec. 115BAB.

Another important change relates to the availability of minimum alternate tax credit to companies that have exercised the option u/s 115BAA & u/s 115BAB. The ordinance did not deal with this issue though it was subsequently clarified by the CBDT that such credits would not be available to those taxpayers who chose to avail of the favorable tax rate option.This clarification is now being sought to be incorporated into the law. This will impact those companies that, having already paid MAT in earlier years, will now have to carefully consider the impact of permanently losing MAT credits that they may have accumulated if they wish to avail of the favorable tax rate immediately. In such cases, it is possible that they may also need to write off such accumulated MAT credits in their financial statements.

These companies will now have to carefully weigh their options in deciding whether and when to opt for this new favorable tax rate regime.

Another significant change proposed in the Bill, deals with the consequences of not fulfilling the conditions prescribed for availing of the favorable lower headline tax rates of 22 per cent or 15 per cent. If any of the prescribed conditions are not fulfilled, the company will neither be able to avail of the option of these lower tax rates for the year in which any such prescribed conditions are violated, nor in any of the subsequent years.

This is a particularly stringent provision and companies will need to be careful that even inadvertently these prescribed conditions are not violated in any year if they want to continue to avail of these lower tax rates. Taxpayers need to be vigilant and carefully avaluate these beneficial provisions before attempting to take any legitimate advantage.