Impact Analysis New Corporate Taxation Regime - PowerPoint Presentation

1. Impact AnalysisNew Corporate Taxation RegimeTaxation Laws(Amendment) Ordinance, 2019BY- CA MANOJ GUPTA1

2. High Tax Rates = Lower ComplianceLow Tax Rates = Higher Compliance2

3. Major Changes3

4. Section 115BAA (Effective from F.Y. 2019-20)Option to all domestic Companies to tax @ 22% plus surcharge and cess-effective rate 25.17%.No exemption or incentive may be claimed.No condition on account of turnover or nature of businessApplicable to all existing and new companiesExisting Tax Rates -25% & 30% plus surcharge & cess (29.12% & 34.94%)-First Schedule of Finance Act 20194

5. Option to pay Tax u/s 115BAA When & How?Should be exercised before due date of furnishing of IT Return U/s 139(1)Option may be exercised in first year or subsequent yearsOnce exercised cannot be withdrawn5

6. Exemptions or Deductions not available to companies opting for section 115BAA Section 10AA- Deduction for units established in Special Economic Zones (SEZ )Section 32(1)(iia)- Additional Depreciation in respect of new plant and machinerySection 32 AD- Deduction for investment in new plant and machinery in notified backward areasSection 33 AB- Deduction in respect of tea, coffee or rubber businessSection 33ABA- Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in IndiaSection 35(1)(ii)- Deduction for donation made to approved scientific research association, university college or other institutes for doing scientific research which may or may not be related to business.6

7. Exemptions or Deductions not available to companies opting for section 115BAA Section 35(1)(iia)- Deduction for payment made to an Indian Company for doing scientific research which may or may not be related to businessSection 35(1)(iii)- Deduction for donation made to university, college or other institution for doing research in social science or statistical researchSection 35(2AA)- Deduction for donation made to National Laboratory or IIT’s. etc for doing scientific research which may or may not be related to businessSection 35(2AB)- Deduction for capital expenditure(excluding cost of land and building) on scientific research relating to business of bio-technology or manufacturing any article or thingSection 80(IA) & 80(IB)- Deduction in respect of profit from undertakings or engaged in infrastructure development.7

8. A ComparisonbetweenCorporate Tax Rates u/s 115BAA & Existing Tax Rates8

9. Category of TaxpayersDomestic Companies whose turnover in Previous Year 2017-18 does not exceed Rs. 400 croresTax liability under normal provisionsTax liability under section 115BAANet saving in taxes (in %)Income upto Rs. 1 crore26.00%25.17%0.83%Income more than Rs. 1 crore but upto Rs. 10 crores27.82%25.17%2.65%Income more than Rs. 10 crores29.12%25.17%3.95%99.3% of total Companies fall in this category9

10. Category of TaxpayersDomestic Companies whose turnover in Previous Year 2017-18 exceeds Rs. 400 croresTax liability under normal provisionsTax liability under section 115BAANet saving in taxes (in %)Income upto Rs. 1 crore31.20%25.17%6.03%Income more than Rs. 1 crore but upto Rs. 10 crores33.38%25.17%8.21%Income more than Rs. 10 crores34.94%25.17%9.77% Biggest Gainer- Companies having Turnover of more than Rs. 400 crores and Income above Rs. 10 crore10

11. Selection of Tax Regime for Existing CompaniesSection 115BAA v/s Regular Tax RegimeHave to forego incentives/deductionsNot eligible to set off any loss C/F, if attributable to any such deduction/incentivesWork out tax liability under existing provision @25% where Turnover is upto Rs.400 crore and @30% where it exceeds Rs. 400 crore and after claiming various deductions/ incentives.Compare with new rate of 25.17% without claiming any deduction/incentives.If existing Tax Regime is beneficial, then the company may opt for 115BAA in subsequent year.Consideration of reduced MAT liability11

12. Which Option to choose?Example:- If a company is having turnover of less than Rs. 400 crore in F.Y. 2017-18. It purchases a Plant & Machinery of Rs. 10 Lacs. Total Income of the company before allowing additional depreciation on Plant & Machinery is Rs. 20 Lacs for F.Y. 2019-20. Now company should use which option?12If company opts for Sec.115BAAIf company does not opt for Sec.115BAATotal Income before additional depreciation20,00,00020,00,000Less: Additional Depreciation available u/s 32(1)(iia)-2,00,000Total Income20,00,00018,00,000Applicable Tax Rate25.17%26%Tax liability5,03,0004,68,000Extra Tax Payable under 115 BAA35,000-

13. Section 115BAB For New Manufacturing CompaniesDomestic Companies- setup and registered on or after 1st October 2019Should commence Manufacturing on or before 31/03/2023No Split up or reconstruction or transfer of assets/businessOld Plant & Machinery upto 20% of total value of Plant & MachineryTax Rate 15% plus surcharge & cess effective rate 17.16%The new rate is Assessee based,not manufacturing unit basedShould not claim any deduction or incentives13

14. Challenges in opting Taxation u/s 115BAB - 17.16%No condition as to turnover Should not engage in any business other than manufacturing (trading, renting, providing services,etc)Income from Interest, Rent, Capital GainConsequences of indulging in any other business activitiesDefinition of Manufacturing/ Production –Controversy (Refining Oil, generating power, job work, Builders,etc.)14

15. Definition of ManufacturingLandmark Judgement of Supreme Court of Delhi Cloth & General Mills Co. Ltd. 1977(1) ELT (J199)(SC)Definition inserted in 2009 in Income Tax Act-Section 2(29BA) wef. 01.04.2009-“Manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,—(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.15

16. Option to pay Tax u/s115 BAB When & How?Option to be exercised in very first year?Before filing of return U/s 139(1)Once exercised cannot be withdrawnIf option is disputed by AO (due to non-manufacturing activity),then cannot opt for section 115BAA 16

17. MAT- Minimum Alternate TaxReduction in MAT rates from 18.5% to 15% (plus surcharge)- Saving of 3.64% to 4.10%No MAT on taxation U/s 115BAA and 115BABThe difference between book profit and taxable profit will not be high, as incentives/deduction not allowed in computation U/s 115BAA.No set off of earlier MAT Credit U/s 115BAA.17

18. Advantages of New Regime-Removal of MAT on LTCG of Capital Assets/ PropertiesThe anomaly of fictitious profit on sale of assets is removed ( Sale Price- Cost of Acquisition= Book Profit), whereas in Income Tax indexed cost is reduced, hence capital gain is lowerLTCG of Equity Shares/ Mutual Fund- Chargeable at lower rate of 10% under Income Tax Act, Whereas MAT charged @18.5% on book profits.STCG on STT Paid Equity Shares/ Mutual Fund-will be taxed at 15%, whereas MAT charged @18.5%.18

19. MAT Credit- Use it or notCircular No. 29/2019 dtd. 2nd October 2019If have credit-remain in earlier tax regime as per turnover limits & fully set offFaster Adjustment of MAT Credit-19Turnover > 400 croreTurnover < 400 croreTax Rate34.94%29.12%MAT Rate17.47%17.47%Difference17.47%11.65%Earlier difference13.39%(34.94-21.55)7.57%(29.12-21.55)Net Differential Advantage4.08%4.08%

20. MAT Credit- Loss due to Higher Tax Rates20Tax Rate34.94%29.12%Tax Rate u/s Sec 115 BAA25.17%25.17%Higher Tax Liability9.77%3.95%Effective Advantage of MAT Credit( Tax Rate as per 115BAA-MAT) (25.17-17.47)7.70%7.70%Note:- Huge Amount of MAT Credit is consumed in higher tax liability.

21. MAT Credit- Not a viable optionIllustration of a company having > 400 crore turnover21Amt. ( in Rupees)Available MAT Credit8 croreTaxable Income & Book Profit100 croreTax liability as per regular provision34.94 croreMAT liability17.47 croreSet Off restricted upto MAT credit8 croreNet tax payable(34.94-8.00)26.94 croreTax liability as per Sec. 115 BAA25.17 croreReason- MAT Credit consumed due to higher tax rates in old tax regime55%Actual utilisation45%

22. MAT Credit- Other IssuesGovernment denied its promise for c/f of creditMAT Credit written off- if opted Sec. 115 BAA -Book Result & EPS – Adverse Effect -(Request for write off in equal installments in 5 years)Deferred Tax Liability- Reduction-Creation of DTANew ITR Forms- F.Y. 2019-20(A.Y. 2020-21)Preparation of ITR’S - Available ITR Software incapable - Manual decision making- selection of option 22

23. Hardships to Borrowers Removed U/s 115BAAWaiver of debt- Write back of loans to P&L A/CEarlier book profit increased and MAT paid Now no MAT- C/F business loss and depreciation is allowed in full, whereas in MAT, lower of business loss or unabsorbed depreciation as per books was allowed.23

24. Advance Tax Recomputation for A.Y. 2020-21 CASE TO CASE STUDYConsider Turnover CategoryConsider C/f losses as per Income Tax ActConsider MAT creditCost benefit AnalysisDecide the option considering future planningWork out total tax liabilityAdjustment of last 2 installments paidExplanation regarding lower Advance Tax payment.24

25. Old Regime v/s New RegimeOld (Existing)New(115BAA & 115BAB)Turnover BasedYesNoBusiness SpecifiedNoYes in 115BABTax RatesHighLowDeductions/Incentives allowedYesNoC/f of lossesYesYes with restrictionsMAT ApplicabilityYesNoMAT Credit AllowedYesNoMigration from one regime to another regime permissibleYesNo25

26. TAX PLANNING THROUGH RESTRUCTURING OF BUSINESS/ENTITY26

27. Structuring of Existing Corporate EntitiesSplitting existing business into Different Companies Manufacturing Units Entitled to Tax Benefits- To continue under old regime and pay MAT @ 17.47%Manufacturing Units not entitled to Tax Benefits- Opt for New Regime 115BAA and pay tax @ 25.17%Slump Sale of Manufacturing Units entitled to tax benefits to WOS at Book ValueOther issues- NCLT Approval, Stamp Duty, MAT Credit Transfer)Commercial Justification of Split- Risk of GARRApplicability of Domestic Transfer Pricing provisions- Sec 92BA27

28. Methods of Reorganisation of Other EntitiesSale of Business(Slump Sale or Itemised Sale)Conversion of Firm into Company ( Section 47 (xiii))Succession of Sole Proprietor by Company (See.47 (xiv))Merger/ Demerger of firm/LLP into CompanyConversion of LLP into Company(No provision- Reverse situation (47 (xiiib))28

29. Taxation Disparity for Individual, HUF, Firm, LLP etc.Tax rate is 30%+surcharge+cess- Average 33.4%Individuals and HUF Tax Rates- Corrective measures are requiredPartnership Firm/LLP having Income above 1 crore- Tax Rate- 34.94%Income RangeTax Rates10-50 Lakhs31.20%50-100 Lakhs34.32%100-200 Lakhs35.88%200-500 Lakhs37.10%Above 500 Lakhs42.30%29

30. Mathematics of Government of IndiaFinance Minister announced loss of Rs. 145000 crore due to tax reliefF.Y. 2017-18, Government collection of Corporate Tax Rs. Rs. 523857 crore.Difference between existing rate of 34.94% and new tax rate of 25.17% is considered the gross revenue loss comes to Rs. 147129 crore.During F.Y. 2017-18, the Government has foregone revenue of Rs. 117337 due to various tax incentives and deductions allowed to domestic companies, which will be saved in new regime U/s 115 BAA & 115 BAB.Hence net revenue loss to Government would be approximately Rs. 29792 or say Rs.30000 crore only.30

31. Thank You!For any query-ContactManoj.g.ca@gmail.com31