GOVERNMENT ANNOUNCES BIG TICKET CHANGES IN CORPORATE TAX RATES & FURTHER CHANGES IN FOREIGN INVESTMENT POLICY 

In September, the Government of India declared major reforms to corporate income tax rates as well as the Foreign Direct Investment Policy for boosting economic growth and attracting investments into the country. This note covers the key aspects of these reforms. 

TAX REFORMS 

Post reduction in tax rates, the taxes would be lower than China and most South Asian economies. The new tax rates are effective on April 1, 2019, subject to certain conditions. 

  • For all existing and new companies, incorporated in India, and not seeking any specific exemption/incentive the income tax rate shall be slashed to 22 %, with the effective rate including surcharge and cess being 25.17 % 
  • For new manufacturing companies, meaning those incorporated in India on or after October 1, 2019, and commencing production on or before March 31, 2023, the tax rate shall be 15 %, with the effective rate including surcharge and cess being 17.16% 
  • Companies opting to be governed by the above regime are not liable to pay Minimum Alternate Tax (MAT). For existing corporates and other corporates not opting for the aforesaid regime, the MAT rate has been reduced from the existing 18.5% to 15%, with the effective MAT rate, including surcharge and cess being16.692/17.472% (depending on whether the quantum of book profits is up to INR 100 million or higher) 

Conditions for applying the regime with reduced tax rates 

  1. Following deductions cannot be claimed under the Act: 
  • Deduction available to a Special Economic Zone unit in respect of exports; 
  • Additional Depreciation, i.e., additional depreciation of 20%/35% on new plant and machinery; 
  • Investment allowance of 15% of the cost for undertakings/enterprises for manufacture or production of any article or thing, on or after April 1, 2015, in any notified backward area; 
  • Deduction in respect of deposits in special/ deposit account by entities growing and manufacturing tea, rubber, coffee; 

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  • Deduction in respect of deposits in Site Restoration account by entities carrying on business consisting of the prospecting for, or extraction or production of, petroleum or natural gas or both in India; 
  • Deduction for sums paid to approved research organizations/ companies, etc. (100%- 150%) – incurring of research expenditure on its own (revenue or capital) can still be claimed as a deduction under the provisions of the Act
  • Deduction of capital expenditure for specified businesses; 
  • Expenditure on agriculture extension project; 
  • Expenditure on skill development project; 
  • Deductions in respect of certain incomes except for deductions on account of salaries/wages to new employees. 
  1. Any loss carried forward from earlier years that are attributable to deductions referred to in I above will not be allowed to be set off and the same would be deemed to have been given full effect; no further deduction of such losses would be allowed in any subsequent year. 

III. Depreciation, other than additional depreciation referred as referred to in point I above, would be allowed in the manner prescribed by tax laws. The reduced tax rate shall be applicable, only if opted for in the return filed for the period ending on or after March 31, 2020 and shall be applicable from the year in which it has so opted. The companies opting for the option above are not liable to pay minimum alternative tax (MAT). Once the option is exercised, it cannot be withdrawn. Companies can evaluate and choose to opt for the new regime after they have exhausted the deductions, benefits under the existing regime. 

  1. Where a new company is incorporated on or after October 1, 2019, to undertake 

manufacturing activity, in addition to the above, it should: 

  • not be formed by splitting up or reconstruction of an existing business; 
  • not use old plant and machinery (other than which is imported) beyond 20% of the value of total plant and machinery; 
  • not use any building previously used as a hotel or a convention centre; 
  • not carry on any other business other than the business of manufacture or production of any article or thing and research concerning, or distribution of, such article or thing manufactured or produced by the said company; 
  • undertake a transfer pricing study to establish that the transactions that it undertakes with related parties are at arm’s length; 

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  • exercise the option to be governed by the new regime in the first of the returns of income filed on or after for the period ending on or after March 31, 2020. For example, if a new company is incorporated in October 2019, it must exercise the option in the tax return for the year FY 2019-20. 

Dividend Distribution Tax to go? 

With an eye on promoting investments, the government may soon abolish the dividend distribution tax (DDT). Dividend distribution tax is the tax imposed on Indian companies on dividend paid to a company’s shareholders. Currently, the dividends paid by a domestic company are subject to dividend distribution tax at 15 % of the aggregate dividend declared, distributed or paid. The effective rate is 20.35 %, including surcharge and cess. 

The task force on direct tax code (DTC) has recommended the abolition of DDT, suggesting its replacement by a classical system of taxation under which dividend receipts be declared as normal income by the recipient of such dividends. 

FDI CHANGES 

Foreign Direct Investment (FDI) is a major driver of economic growth and a source of non- debt finance for the economic development of the country. In the month of September, the Indian government further liberalized the already-liberal FDI policy by making changes with respect to FDI in the following sectors: 

(a) Contract Manufacturing 

FDI in Indian entities which are engaged in contract manufacturing whether on principal- to- principal basis or on principal to agent basis is now permitted under the 100% automatic route. Consequently, companies can now set up and operate entities engaged solely in the business of contract manufacturing, or such companies can directly invest in the local contract manufacturers. Further, a manufacturer will now be permitted to sell his products manufactured in India through wholesale and/or retail, including through e-commerce without requiring any approvals. 

(b) Single brand retail trading (SBRT) 

Subject to conditions as discussed below 100% FDI under automatic route has been permitted for retail trading of single brand products. 

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Following conditions will apply to such investment as stated below: 

  • Products to be sold should belong to a single brand; 
  • Products should be sold under the same brand in one or more countries other than India; 
  • Only products that are branded during the process of manufacturing will qualify. 
  • Single brand retail trading by a non-resident can be carried out either directly by the brand owner or through agreement; 
  • For proposed investment beyond 51%, sourcing of 30% of the value of the goods will have to be procured from within India. 
  • All procurements made from India by the entity for the single brand shall be counted towards local sourcing of 30%, irrespective of whether the goods procured are sold in India or exported. Further, entire sourcing from India for global operations (and not just for the incremental value) will be counted towards local sourcing requirement. 
  • An entity operating brick and mortar stores can undertake retail through e- commerce. Retail trading through e-commerce, however, can also be undertaken before the opening of brick and mortar stores subject to the condition that brick and mortar stores should be opened within 2 years from the date online retail was initiated. 

(c) Digital Media 

In addition to the current FDI policy for print media which allows 26% FDI under approval route (i.e., publishing of newspaper and periodicals dealing with news and current affairs) and 49% under approval route in ‘Up-linking of News and Current Affairs on TV Channels’, Indian government has now also allowed 26% FDI under approval route for uploading/streaming of news & current affairs through digital media. 

(d) Coal Mining 

With a view to attract global miners to invest in India and tackle the issue of fuel shortage, 100% FDI under automatic route (that is, without the prior approval of any governmental authority) has been allowed for sale of coal and coal mining activities including associated processing services (subject to the relevant Acts). 

Now, coal & lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities (subject to Coal Mines Act and Mines and 

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Minerals Act) shall be permissible. Also, it is now permissible to set up plants for associated processing services such as coal washery, coal crushing, coal handling and separation (magnetic and non-magnetic), subject to the condition that the company shall not mine coal and shall not sell sized or washed coal from its plant in the open market. Such coal sized or washed in the processing plant shall be sold to those parties that are supplying raw coal to coal processing plants for washing or sizing. 

Authors: Shivendra Kundra/Osheen Sharma

Kundra & Bansal

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