Firms can set up units to avail tax cut, but with riders
NEW DELHI: Existing companies can set up new units to avail the lowest corporate tax rate of 15%, but with some riders—they cannot form new corporate entities by the splitting up or reconstruction of existing businesses, and the new units cannot use old plants or machinery, two government officials said requesting anonymity.
Companies formed as a result of reconstruction or revival will, however, be exempt from the riders, one of the officials with direct knowledge of the matter said.
While companies setting up new entities to avail the 15% tax rate are prohibited to use any old plant or machinery, an exception is made in such cases where old plants and machinery used by any other entity can be imported from other countries, the official added.
“The detailed rules and regulations pertaining to announcements related to corporate tax rates cut will be notified soon, which will clarify all points,” the official said.
According to a second official, the finance ministry is currently working on the detailed criteria for companies to shift to the lower corporate tax regime announced by finance minister Nirmala Sitharaman ahead of the Goa meeting of the 37th Goods and Services Tax (GST) Council.
On September 20, the finance minister announced slashing of corporate tax rates for domestic manufacturers from 30% to 22%, while for the rate was reduced from 25% to 15% for new manufacturing companies, provided they do not claim any exemptions. The government also exempted manufacturing companies from paying minimum alternate tax (MAT). The move reduced effective tax rate from 34.94% (with surcharge and cess) to 25.17% for existing firms and from 29.12% to 17.01% for new companies incorporated on or after October 1, 2019.
Experts said smaller companies—up to ₹400 crore turnover— enjoying a 5% tax advantage will no longer have an advantage over larger firms. They have three options: to remain in the 25% tax bracket and enjoy exemptions, migrate to the 22% option for existing firms after giving up exemptions, or set up a new corporate entity on or after October 1 to enjoy lowest tax rate of 15%, the first official said. Only new corporate entities set up on or after October 1, 2019 can avail the 15% tax rate irrespective of their turnovers, but they must commence production by March 31, 2023.
A partner in the law firm Shardul Amarchand Mangaldas, Abhay Sharma, said: “While existing small-scale manufacturing companies are at a disadvantage compared to newly formed companies, the government’s rationale is to incentivise expansion of the manufacturing sector which in turn will lead to job creation. It is no different in that sense when compared to the tax breaks that have been offered in the past to companies operating in an SEZ (special economic zone) for example, whereby non-sez based companies were at a disadvantage as compared to their peers located in a SEZS.” He added: “Existing firms looking to expand will look to house the expansion in a new company to avail of the lower corporate tax rate. In some cases, if the exemptions/deductions being availed are significant, smaller firms may look to continue under the older tax slabs.”
According to Deloitte India partner Rohinton Sidhwa, the recent tax rates cut have not put smaller companies (with turnover up to ₹400 crore) at a disadvantage. “Previously the effective tax rates form companies with the turnover limit of ₹400 crore was between 26% to 29.12% (including surcharge and cess). Further, MAT was still payable at the rates of 19.24%-21.55%. Companies that continue to avail of exemptions and incentives will continue to pay tax at those rates but MAT will now stand reduced from 15.6%-17.47%. Hence there is a gain on MAT,” Sidhwa said.
“Alternatively, under the new regime a flat rate of 25.17% is applicable (for existing companies migrating to the new tax regime) assuming such companies give up claim for incentives. Further no MAT will also be applicable for such companies. So companies under the old regime can migrate to this regime,” Sidhwa said.