India introduces concessional tax regimes for domestic companies
Umesh Gala and Shruti Lohia of Dhruva Advisors examine India’s new tax concessional regimes, introduced to give domestic companies and manufacturers a boost. India also make its move towards a tax e-assessment system.
India has traditionally been a high corporate tax jurisdiction. Up until September 2019, the effective corporate tax rates (including surcharge and cess) were almost 35% for large domestic companies and a little less than 30% for smaller companies. With a view to making Indian domestic companies competitive, a tax ordinance was passed by the government on September 20 2019.
As part of the ordinance, two concessional tax regimes were introduced. Both regimes are optional and companies are required to elect the tax rate regime by which they want to be governed.
The first regime is a concessional regime for existing domestic companies. The headline tax rate applicable for all existing domestic companies is reduced to 22%, resulting in an effective rate of 25.17%. However, companies opting for this regime will not be entitled to claim specified tax deductions/incentives, such as additional depreciation, tax holidays and weighted deduction. Furthermore, these companies would not be subject to the provisions of minimum alternate tax (MAT).
Under the ‘normal’ tax regime, where a domestic company’s computed tax profits are less than its book profits, MAT is payable on the book profits at a rate of about 21.5%. The difference between the tax payable under normal provisions and the amount of MAT paid can be carried forward by the company for around 15 years, and used in future years against normal tax payable to the extent that it exceeds the notional MAT payable in that year.
Tax administrators have clarified that in opting for the concessional tax regime, a domestic company will not be allowed to claim the accumulated MAT credit and business losses attributable to additional depreciation.
The second concessional tax regime applies to new domestic manufacturing companies. With a view to promoting the ‘Make in India’ initiative, a new provision has been introduced to provide for a beneficial rate of 15% (effective rate of 17.16%) for domestic manufacturing companies which are set up and registered after October 1 2019 and which start manufacturing before March 31 2023. As with the concessional tax regime of 22%, new manufacturing companies would not be able to avail the tax deductions/incentives and MAT would not be applicable to them. The option to avail this tax regime has to be chosen by the company in its first income-tax return.
Certain anti-abuse requirements have also been established for companies wanting to opt for the concessional tax regime of 15%. For instance, a company should not be formed by the splitting-up or reconstruction of a business that was already in existence. A company cannot engage in any business other than manufacturing and research or distribution. Further, the company cannot use any plant or machinery previously used in India, with a value exceeding 20% of total value of plant or machinery; or any building previously used as a hotel or convention centre.
While availing this concessional tax regime of 15%, such domestic companies will also be subject to domestic transfer pricing regulations.
For domestic companies not availing either of the concessional tax regimes (companies which continue to be taxable under the older tax regime of about 35% after availing tax incentives/deductions), the Ordinance reduces the rate of MAT applicable for all domestic companies from 21.5% to 17.5%.
Both the above announcements have been rolled out as part of series of policy changes to address the slump in economic growth and to boost investments.
Launching the e-Assessment Scheme
Recently, the Central Board of Direct Taxes introduced a new scheme of assessment under the Income Tax Law allowing faceless tax audits to be conducted: the e-Assessment Scheme. The scheme was initiated with a view to eliminating the interface between income tax officers and taxpayers, optimising the use of administrative resources and introducing team-based assessments with dynamic jurisdiction.
The scheme involves a stepwise process to conduct audits using technology to mediate communication between taxpayers and tax authorities in lieu of existing manual interface and single officer-based assessments.
The scheme was made operative via the establishment of the National e-Assessment Centre (NeAC) in New Delhi. Several senior tax officials were transferred to NeAC and the Regional Centres (ReAC) to supervise its implementation.