The Lok Sabha today passed the Taxation Laws (Amendment) Bill, 2019, to slash corporate tax rate to 22% without incentives and tax rate for new manufacturing entities to 15%.
The Bill will replace the ordinance promulgated by the Central govt. in this regard on September 20, with certain variations. While introducing the Bill, Finance Minister Nirmala Sitharaman told the house today that the ordinance was promulgated "keeping in mind the trade war between USA and China, with indications that many of these corporates and multinational companies would want to get out of China."
BJP MP Dr. Nishikant Dubey said that the Bill was crucial to make the 'Make in India' programme a success. He pointed out that the average corporate tax rate in Asia was merely 20.45% while the entire world's average was only 22%. In such circumstances, he said, the manufacturing companies would not entertain the erstwhile 30% tax levied in India.
Salient Features of the Bill
Optional Tax Rates For Domestic Companies
Currently, the income tax rate for domestic companies with annual turnover of up to Rs 400 crore is 25%. For other domestic companies, the tax rate is 30%. The Bill provides domestic companies with an option to pay income tax at the rate of 22%, provided they do not claim certain deductions under the IT Act. These include deductions provided for: (i) newly established units in Special Economic Zones (SEZs), (ii) investment in new plant or machinery in notified backward areas, (iii) expenditure on scientific research, agriculture extension, and skill development projects, (iv) depreciation of new plant or machinery (in certain cases), and (v) various other provisions in the IT Act under Chapter VI-A.
Domestic companies will have to pay surcharge at 7% if their income is between one crore rupees and Rs 10 crore, and at 12%, if income is more than Rs 10 crore.
Tax Rates For New Domestic Manufacturing Companies
The Bill provides new domestic manufacturing companies with an option to pay income tax at the rate of 15%, provided they do not claim the deductions specified above. These new companies must be set up and registered after September 30, 2019 and should start manufacturing before April 1, 2023.
These new manufacturing companies will not include companies: (i) formed by splitting up or reconstruction of an existing business, (ii) engaged in any business other than manufacturing or production, and (iii) using any plant or machinery previously used in India (except under certain specified conditions).
Companies opting for the new rates will have to pay a 10% surcharge.
The Bill clarifies that the following businesses will not be included in the manufacturing sector for tax reduction purposes: (i) development of computer software, (ii) printing of books, (iii) production of cinematograph film, (iv) mining, and (v) any other business notified by the central government.
Minimum Alternate Tax
Minimum Alternate Tax (MAT) is the minimum amount of tax required to be paid by a company, in case its normal tax liability after claiming deductions falls below a certain limit. This limit is calculated as a certain percentage (MAT rate) of the company's book profit. The Bill reduces the MAT rate from 18.5% to 15% with effect from financial year 2020-21.
The Bill specifies that the provisions regarding payment of MAT and MAT credit will not apply to companies opting for the new tax rates. MAT credit is the amount of additional tax a company is required to pay as MAT, in excess of its normal tax liability.
Surcharge on capital gains
The Bill separates surcharge on capital gains from that on all other income. Capital gains will be subject to surcharge if the total income does not exceed one crore rupees. Otherwise, a flat 15% rate of surcharge will be applicable for capital gains.
However, this provision is applicable only to: (i) investments by foreign institutional investors, and (ii) investments by domestic persons in securities where the securities transaction tax is paid.
The Bill was widely opposed by the Members of the house who were concerned by the record low fall in GDP and said that the government should instead focus on increasing the purchasing power of the citizens by reducing personal income tax. This in turn, they said, will increase the demand and will automatically resolve the present economic crisis and increase employment opportunities. "Unemployment is at a 40-year high," TDP MP Jayadev Galla pointed out.
On this issue, BJD MP Bhartruhari Mahtab said "we need to focus on increasing the demand, not on altering tax rates." He also pointed out that reduction in corporate taxes could only be beneficial if the companies directed the benefit arising out of such reductions towards resources in India. Strongly resisting the Bill, DMK's A. Raja said, "the govt. is not ready to accept that we are facing economic slowdown…They are not ready to accept that implementing GST was wrong."
AIMIM's Asaduddin Owaisi said that it was essential to rather increase tax collection for social equality, but unfortunately, it was being decreased. He mentioned the plight of the auto industry and the increase of retail inflation. He criticized the increase in consumer food prices and backed his assertions with empirical data.
Talking about the complex nature and hidden tax rates, Congress MP Gaurav Gogoi said, "This Bill is a multi-layered corporate tax structure. Just like GST is a complicated corporate tax structure, so is this Bill."
Demanding a comprehensive approach towards the contemporary economic crisis, AITC MP Mahua Moitra said,
"corporate tax cut that you have proposed only helps the profitable become more profitable. It does not do anything to revive a very large part of this economy which is struggling… The government wants to treat foreigners better than Indians. That is why FIIs are exempted from paying the taxes. I request you to treat the economic problem holistically, the tax cut will apply to all manufacturers."
Defending the Bill, Dr. Nishikant Dubey said that the Bill was aimed at increasing employment opportunities by boosting the manufacturing sector. Responding to the concerns raised by the members on the record low fall in GDP, Dubey said that more than GDP, "Sustainable Economic Development" of the country was important, which the govt. had ensured by putting in place various social welfare schemes.
TRS MP Gaddam Reddy also supported the Bill but he urged the govt. to increase the time-limit set for new manufacturing companies to begin production to further 2 years, instead of the present deadline of April 1, 2023.
The Bill was passed by a voice vote, with certain amendments proposed by the Finance Minister herself. It will now be tabled before the Rajya Sabha.
With Inputs From PRS Legislative Research
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