The Finance Minister while presenting the budget for financial year 2016/17 observed as under:
“I had, in my last budget speech mooted the proposal to reduce the rate of Corporate Tax from 30% to 25% over a period, accompanied by rationalization and removal of various tax exemptions and incentives. In any case the, effective rate of tax paid by companies comes to an average of 24.67% because of various exemptions and tax incentives was placed in public domain and we have received a large number of constructive suggestions. The final plan of phasing out exemptions is given in Annexure . The highlights are as follows:-
- The accelerated depreciation provided under Income tax Act will be limited to maximum 40% from 01-04-2017.
- The benefit of deductions for Research would be limited to 150% from 01-04- 2017 and 100% from 01-04-2020.
- The benefit of section 10AA to new SEZ units will be available to those units which commence activity before 31-03-2020.
- The weighted deduction under section 35CCD for skill development will continue upto 01-04-2020
The reduction in corporate ta rate has to be calibrated with additional revenue expected from the incentives being phased out. The benefits from phasing out of exemption are available to Government only gradually. In the first phase, therefore I propose the following two changes in corporate income tax rates:-
- The new manufacturing companies which are incorporated on or after 01-03-2016 are proposed to be given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.
- I also propose to lower the corporate income tax rate for the next financial year of relatively small enterprise i.e. companies with turnover not exceeding Rs. 5 crore (in the financial year ended March 2015), to 29% plus surcharge and ces.
Therefore, the new regime of taxation imposes tax on domestic companies under sections 115BA, 115BAA and 115BAB of the Act at concessional rates after removing certain incentives and deduction.
Further, all these sections start with “Notwithstanding anything contained in this Act”, which mean that the sections are non obstante – means these sections override the other sections of the Act.
The term company has been defined u/s. 2(17), which means:
- any Indian company, or
- any body corporate incorporated by or under the laws of a country outside India, or
- any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income tax Act, 1922 or
- which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or
- any institution, association or body, whether incorporated or not and whether Indian or non Indian, which is declared by general or special order of the Board. Such institution, association or body shall be deemed to be a company only for such assessment year or assessment years as may be specified in the declaration.
1) Tax on income of certain manufacturing domestic companies
Section 115BA has been introduced by the Finance Act, 2016 with effect from Assessment year 2017/18. An option is given to domestic company who is engaged in the business of manufacture or production of any article or thing and research in relation to or distribution of such article or thing to pay income tax @ 25%, subject of fulfilment of conditions mentioned in sub-section (2) of section 115BA,
What is manufacturing
The term “manufacture “ has been defined u/s. 2(29 BA) of the Act. Manufacture with its grammatical variations, means a change in non- living physical object or article or thing:-
- resulting in transformation of the object or article or thing into and distinct object or article or thing having a different name, character and use, or
- bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.
Thus a new product emerges from the process, it amounts to manufacture.
The Supreme Court in Ujagar Prints v. UOI [179 ITR 317) held that the prevalent and generally accepted test to ascertain whether there is ‘manufacture’ is to find whether the change or services of changes brought about by the application of process take the commodity to point where commercially it can no longer be regarded as the original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process.
Article or things:
The word “ article and things” are used interchangeable It is submitted that “article or thing” means the same thing as “goods” and would apply to movable property that is capable of being sold or marketed [see page 596 of Kanga and Palkhivala Eleventh Edition]
Sub section (2) of section 115BA provides for following conditions:
- the company has been set up and registered on or after March 01,2016;
- the company is exclusively engaged in business of manufacture or production of any article or things and research in relation to or distribution of such article or thing manufactured or produced by it; and
- total income has to be computed without any of the deductions [sixteen in number] mentioned below
- Any deduction available for companies that have been established in Special Economic Zones u/s. 10AA
- Any additional depreciation u/s. 32(1)(iia)
- Any investment allowance in new Plant and Machinery u/s. 32AC
- Any investment allowance in new plant or machinery in notified backward area in certain states u/s. 32AD
- Any deduction in Tea, Coffee or rubber development account u/s. 33AB
- Any deduction under Site Restoration fund u/s 33ABA
- Any deduction for expenses towards Scientific Research on any amount provided to research institution, university, collage etc. u/s. 35(1)(ii)
- Any sum paid to a company for scientific research u/s. 35(1)(iia)
- Any sum paid to a research association, college or other institution which has as its object the undertaking of research in social science or statistical research u/s. 35(1)(iii)
- Any sum paid to a National Laboratory or a university or an Indian Institute of Technology or other specified person with a specific direction that it shall be used for scientific research undertaken under a programme approved by the prescribed authority u/s. 35(2AA).
- A company engaged in the business of bio technology or in any business
of manufacture o production of any article or thing (other than article or thing specified in Eleventh Schedule) incurs any expenditure on scientific research.(not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authorities u/s. 35(2AB).
- Any expenditure on eligible projects or scheme u/s. 35AC.
- Any deduction in respect of expenditure on specified business u/s. 35AD
- Any expenditure on agricultural extension project u/s. 35CCC.
- Any expenditure on skill development project u/s. 35CCD and
- Any deduction as per Chapter VIA on certain income other than the provisions of S. 80JJAA i.e. deduction in respect of employment of new employees.
Section 115BA( 2) (ii) also prohibits to set off any loss carried forward from earlier assessment year in respect of any of the deductions referred to above and the aforesaid loss shall be deemed to have given full effect, and no further deduction for such lose shall be allowed for any subsequent year.
Notwithstandng the above disallowance of deductions other allowances and deductions provided in the Act are allowable.
The company has to choose the option of taxation u/s 115BA either on or before filing the first of the return of income u/s. 139(1) of the Act in Form No. 10IB Once the option is exercised for any previous year, it cannot be withdrawn except it opts to pay tax u/s 115BAA (i.e. @ 22%)
Tax on income of certain domestic companies Section 115BAA has been introduced by the Taxation Laws (Amendment) Act, 2019 with effect from April 01, 2020 i.e. from assessment year 2020/21. This section is similar to section 115BA and is applicable to all domestic companies irrespective of their nature of business and date of set up . Domestic companies can opt to avail the concessional rate of tax @ 22% subject of restrictions set out in sub section (2). These restrictions are similar to section 115BA (except S. 32AC i.e. Investment in new Plant and machinery installed before March 31,2017 and section 35AC i.e. expenditure on eligible projects or scheme, incurred before March 31, 2018, since section 115BA was applicable from assessment year 2017/18, wherein those sections were applicable.
Alike section 115BA no deduction is allowable under chapter VIA except section 80JJAA i.e. deduction in respect of employment of new employees and section 80M i.e. deduction respect of certain inter-corporate dividend
Likewise, no loss carried forward from any earlier assessment years in respect of prohibited deductions be allowed to set off and the aforesaid loss shall be deemed to have given full effect. Even in case of amalgamation or demerger of companies no loss shall be allowed to set off in respect of any of the prohibited deductions.
Similar to section 115BA in this section also the company shall have to exercise the option for lower rate of tax before filing the return of income u/s. 139(1) of the Act in Form No. 10IC and such option once exercised shall apply to subsequent assessment years. Further, once the option has been exercised it cannot be withdrawn for the same or any other previous year. However If option is exercised u/s. 115BAB but has been rendered invalid due to violation of certain conditions specified in that section, then the assessee may excise the option under this section.
Further sub section (4) of section 115BAA provides for a deduction that if a company having unit in the International Financial Services Centre, then such company shall be entitled to deduction u/s. 80LA under chapter VIA.
Taxation on Income of new manufacturing domestic companies
Section 115BAB also has been inserted by the Taxation Laws (Amendment) Act 2019 with effect from April 01,2020 i.e. from assessment year 2020/21, Under this section, the income tax payable in respect of total income of domestic company shall at the opinion of the company be @ 15% if the conditions contained in sub section (2) are satisfied.
Conditions to be fulfilled:
As per sub section (2), the following conditions are to be complied with, otherwise option would be invalid:
- The company has been set up and registered on or before October 01,2019 and has commenced manufacturing or production of an article or thing on or before March 31,2024.
- Further, the business is not formed by splitting up or the reconstruction, of a business already in existence, However, this condition shall not apply in respect of a company, business of which is formed as a result of re-establishment, reconstruction or revival of the business of such undertaking as referred to in section 33B in the circumstances and within the period specified in the said section.
- Does not use any machinery or plant previously used for any purpose. The Explanation clarifies that any machinery or plant which was used outside India by any other person shall not be regarded as machinery or plant previously used for any purpose, if following conditions are fulfilled.
- Such machinery or plant was not, at any time previous to the date of the installation used in India;
- Such machinery or plant is imported into India from any country outside India, and
- No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the Company.
However, where in the case of a person any machinery or plant or any part thereof previously used for any purpose put to use by the company and the total value of such machinery, plant or part thereof does not exceed 20% of the total value of the machinery or plant used by the company, then, for the purpose of this clause, the condition specified therein shall be deemed to have been complied with.
- Does not use any building previously used as a hotel or Convention Centre, as the case may be, in respect of which deduction u/s. 80ID has been claimed and allowed. The expressions ‘hotel” and “Convention Centre” shall have the meaning respectively assigned to them in clause (a) and clause (b) of sub section (6) of section 80D.
- The company is not engaged in any businesses other than the business of distribution of, such article or thing manufactured or produced by it. For
this clause business of manufacture or production of any article or thing shall include the business of generation of electricity. Further, it is hereby clarified that the business of manufacture or production of any article or thing shall not include business of:
- Development of computer software in any form or in any media;
- Conversion of marble blocks or similar items into slabs;
- Bottling of gas into cylinder;
- Printing of books or production of cinematograph films; or
- Any other business as may be notified by the Central Government of India in this behalf.
- The total income of the company has been computed without any deduction mentioned u/s. 115BA(2) and u/s. 115BAA (2) except deduction u/s. 80JJAA or section 80M of chapter VIA.
- Without set off of any, loss or allowance for unabsorbed depreciation so u/s. which is attributable to any of the deduction referred to sub section (2) of section 115BA and sub section (2) of section 115BAA and loss shall be deemed to have been given full effect to and no further deduction for such loss shall be allowed in. Even in case of demerger or amalgamation u/s. 72A, position remains the same.
- Further, it is clarified that in case of an amalgamation option to opt for taxation under this section shall remain valid in case of the amalgamated company only if the conditions mentioned above are complied with.
Check on Inflated Claims:
If it appears to the Assessing Officer that owing to the close connection between the person to which this section applies and any other person, or for any other reason the course of business between them is so arranged that the business transacted between them produces to the person more than the ordinary profits which might be expected to arise in such business, the Assessing Officer shall, in computing the profits and gains of such business for the purposes of this section, take the amount of profits as may be reasonably deemed have been derived. Further the amount being profit in excess of the amount of the profits determined by the Assessing Officer, shall be deemed to be the income of the person and shall be taxed @ 30%.
Further more, it is provided that in case the aforesaid arrangement, involves a specified domestic transactions referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to Arm’s length price as defined u/s. 92F(ii).
Option to be exercised
This section shall apply only the option is exercised by the company in the Form No. 10ID on or before the due date specified u/s. 139(1) for furnishing the first of the returns of income for any previous year commencing from assessment year 2020/21; and such option once exercised shall apply to subsequent assessment years. Further once the option is exercised for any previous year it cannot be withdrawn for the same or any other previous year.
No benefit u/s. 80LA
Unlike section 115BAA this section does not provide any benefit to a unit established in the International Financial Services Centre as referred to in section 80LA(1A), for the Services Centre as referred to in S. 80LA(IA), for the reason that no manufacturing or production unit can be established in the International Financial Service Centre.
Further section clarifies the following points:
- Where the total income of the company includes any income which has neither been derived from nor incidental to manufacturing or production of an article or thing in respect of which no specific rate of tax has been prescribed separately under this chapter, such income shall be taxed @ 22% and no deduction or allowance in respect of any expenditure or allowance has specified u/s 115BAA(2) shall be allowed in computing such income.
- In respect of income being short term capital gain derived from transfer of a capital asset on which no depreciation is allowable under this Act shall be computed @ 22%.
- For the purpose of section 115AA and this section the expression “unabsorbed deprecation” shall have the meaning assigned to u/s. 72A(7)(b) of the Act.
- If any difficult arises regarding fulfillment of the conditions, the Board may with approval of Central Govt. issue guidelines for the purpose of removing the difficulty and to promote manufacturing or production of article or thing using new plant & machinery
- Every guidelines issued by the Board shall be binding on the company and income tax authorities.
Thus from, the above it is clear, that as per intention of the Government, the Finance Minister has reduced the tax rate but removed certain incentives and deductions.