AN INSIGHT INTO THE TAXATION LAWS (AMENDMENT) ACT, 2019

Author: Kavya H, 3rd Year,B.A LL.B, SDM Law College, Mangalore. The article has been written by the author while pursuing the internship programme with us INTRODUCTION Economic growth is the prime concern for every country. In this regard, taxes play an important role to boost up the economy and are considered as a source of revenue. It is axiomatic that taxation is a strong pillar and instrument for attaining economic stability. Therefore, a structured and well-defined provision to regulate this system is the need of the hour. Considering this objective, the Taxation Laws (Amendment) Act, 2019 was implemented to promote economic growth and incentives. The article presents a brief analysis of the Taxation Laws (Amendment) Act, 2019, highlighting the background, need, and the objective of this legislation. Further, a bird’s- eye view of the key amendments along with the issues and challenges have been analysed. The article concludes by giving a critical analysis and the effects of the Act. BACKGROUND The companies in India pay tax in accordance with the Income Tax Act, 1961. The act provides that the companies incorporated in India, that is, the domestic companies[1] having an annual income of up to four hundred crores are required to pay income tax at the rate of twenty-five percent[2]. Companies other than domestic companies are required to pay tax at the rate of thirty percent[3]. Furthermore, a surcharge on income tax, health and education cess[4] needs to be paid by the companies. Surcharge is the additional tax to be paid to the existing tax rate and is expected that a company can pay higher taxes when compared with individuals and is therefore subjected to a surcharge. The statutory tax rate for domestic companies including surcharge and cess ranges between twenty-six percent and thirty-five percent[5]. One of the notable steps towards the introduction of this enactment was the introduction of the Direct Taxes Code, 2009. The primary objective of the Direct Tax Code is to simplify and consolidate all direct tax laws of the central government[6] as consolidation reduces the administrative costs. Simplifying the tax laws by using simpler and explicit language creates an effective system as compliance costs[7] for corporate taxpayers will be reduced. Through this system, it becomes easy for the central government to collect the tax which saves time, money and promotes equality and certainty as it is based on the ability to pay. The code proposed a uniform tax rate of twenty-five percent for all domestic companies. With a proposed thirty percent tax rate for domestic companies, the direct tax code was introduced in the Lok Sabha in 2010 but was lapsed due to the dissolution of the 15th Lok Sabha.[8] NEED FOR THE LEGISLATION: The need for the legislation was brought out in the 2015-16 Budget speech[9] when the Finance Minister pointed out a noteworthy statement regarding the tax rate and its relation with economic growth. It was stated that, in India, there is a higher corporate tax rate[10] of thirty percent when compared with other countries. The fast-growing economies like Hong Kong, Vietnam, Malaysia, and Singapore have reduced corporate tax rates by 16.5 percent, 20 percent, 24 percent, and 17 percent respectively. This makes the country noncompetitive as the effective revenue realized by the government is at a rate of twenty-two percent to the excessive exemptions. The Finance Minister proposed for rationalization and removal of incentives and exemptions along with reducing the tax rate from thirty percent to twenty-five percent for a period of four years as it would raise the revenue by attracting new businesses and also will make the country competitive in the world markets. In November 2017, a Task Force was created by the Ministry of Finance, and the report was submitted in August 2019[11]. In September 2019, the tax laws ordinance 2019 was promulgated by the President. Later, the Finance Minister introduced the Bill in Lok Sabha on 25th November 2019. Lok Sabha passed the bill on 2nd December and Rajya sabha on 5th December 2019. The bill received the Presidential assent on 11th December 2019. OBJECTIVE OF THE LEGISLATION: Through the implementation of this amendment Act, it aims to attract investments in manufacturing sectors and also caters to the growth of the economy by lowering the tax rates. Investments in the manufacturing sector create more demand and enhance productivity by introducing new technologies and thereby fosters economic growth. The Act provides amendments to the Income Tax Act, 1961, and to the Finance (No. 2) Act, 2019. It will also replace the ordinance promulgated by the President in September 2019 which was passed with the aim of reducing corporate tax rates. KEY HIGHLIGHTS OF THE AMENDMENT ACT ● Domestic companies are given an option to pay tax at a lowered rate of 22 percent. ● As long as no deductions are claimed from the provisions of the Income Tax Act, 1961, the new domestic companies can pay tax at the rate of 15 percent. ● The companies opting for this system are exempted from the provisions of minimum alternative tax (MAT). MAT is the minimum alternative tax rate, which a company is required to pay, in case its normal tax liability falls below thirty-percent of the book profit (Book profit is the net profit shown in the profit and loss account). Through this system, the taxation of those companies which show negligible income to avoid tax rate is facilitated. ● The domestic companies can opt for this method in the 2019-20 financial year or in any other financial year and if opted, shall apply in succeeding years. AMENDED PROVISIONS The Act has been systematically structured into three chapters. Firstly, it deals with the short extent and title. Secondly, the amended provisions of the Income Tax Act, 1961 is stated, and thirdly, the amendments to the Finance (No. 2) Act of 2019 is mentioned. The amendments to the Acts are mentioned below: ● Domestic companies are given an option to pay taxes at the rate of 22 percent[12]. However, a condition is prescribed to this rule, that is, it is applicable as long as they do not claim certain deductions under the Income Tax Act. These deductions include deductions claimed by units established in special economic zones[13], additional depreciation on new plant and machinery[14], site restoration fund[15], reductions for scientific research[16], agriculture[17] and skill development[18] extension project expenses, investments in new plants and machineries[19], tea coffee, rubber development accounts[20], and reductions in specified businesses[21]. ● Currently, a twenty-five percent tax rate is paid by the domestic companies with an annual turnover of four-hundred crores[22]. As long as the new domestic companies do not claim certain deductions, these companies are given an option of paying tax at the rate of fifteen percent. Such companies must be registered after September 30 2019 and start manufacturing before April 1, 2023. ● The domestic companies in the fiscal year 2019-20 or in any other fiscal year are given the right to choose the new reduced tax rates. This is subject to the condition that once this has opted it shall apply in subsequent years also[23]. ● The ordinance lacked clarity as there was no mention of the surcharge rate for companies. The Act specifies a surcharge of ten percent[24] for concessional rate, head capital gains, and dividends from foreign companies. For the domestic companies, if the income is between one crore rupees and ten crore rupees, the surcharge rate is seven percent and for companies whose income is more than ten crore rupees, it is twelve percent. ● The scope of the two crucial terms ‘manufacture’ and ‘production’ was not defined under the Ordinance. However, the Act clearly lays down specific terms which are included within the ambit of these two terms. It includes: development of computer software, mining, conversion of marble blocks into slabs, bottling of gas into cylinders, printing of books or products, and any other as notified by the Government of India.[25] ● The Law is strict and well-defined in the Act as a violation of any of the provisions mentioned under Section 115BAB(1), invalidate the options availed by the companies in the current and in the subsequent years. ● A company is liable to pay a certain limit of tax. If this liability falls below a certain limit even after claiming the deductions, then the company is liable to pay minimum alternative tax. The Act gives clear instruction of the Minimum Alternative Tax (MAT) through the insertion of Section 115JAA (7) and specifies that MAT credit would not be applicable for companies choosing this new system. The Ordinance was silent about the condition of reconstruction of business[26]. However, the Act specifies these conditions and the provisions stating similar conditions in the Act shall apply. Those companies opting for the new system of tax payment cannot split or reconstruct their businesses which are already in existence as it increases employment uncertainty, creates loss to assets, and diminishes investments. CRITICAL VIEWS Even though the Act aims at increasing economic growth, it is not free from criticisms. Lowering the tax rate has two sides. On the one hand, it aims at higher incentives and establishing new businesses as the companies can opt for the new reduced tax rate of 22 percent. This also creates higher employment rates, increases development, and capital transfer rises. On the other hand, it increases the fiscal deficit in the country as lowering the tax rate affects the revenue system and the government will face insufficiency in funds. This solely depends on the companies opting for the new system and also on the difference between the old and new tax rates[27]. Considering the year 2019-20, 5.2 percent of 1.45 lakh crore is the revenue loss for the government if the new system is adopted[28]. The revenue impact is crucial for the government as expenditure on scientific research, SEZ units export profits are not available and there is a deduction of rupees one lakh in the year 2017-18. The software and media industry are adversely affected due to this Act as these terms are not included within the scope and meaning of ‘manufacture’ or ‘production’ and hence is not qualified to avail the fifteen percent headline tax rate[29]. The Act also creates confusion among choosing the lower tax rates and the minimum alternative tax rates. CONCLUSION The implementation of the Taxation Laws (Amendment) Act, 2019 is certainly a step towards attaining economic growth. Lowering the tax rates yields after-tax returns. The extra capital yields more productive work, employment, and this in turn increases the level of output thereby rising wages. This also encourages the growth of the economy as Tax cuts increase disposable income and increase investments by encouraging business. Through the economic growth of the country, the national income rises, better employment opportunities can be availed thereby the standard of living increases. Existing businesses also have an option to expand the jurisdiction and the establishment of a new business can be promoted. The specific well-defined and precise provisions in the amendment Act provides further clarity. The Act also provides for strict laws as failure to comply with the provisions amounts to non-availability of options of lowered tax rates in the current and subsequent years. Reference: [1] Section 2(22A), The Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India), “domestic company” means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has
made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income. [2] 1st Schedule, Part III, Paragraph E(I)(i), The Finance (No. 2) Act, 2019, No. 23, Acts of Parliament, 2019 (India). [3] 1st Schedule, Part III, Paragraph E(I)(ii), The Finance (No. 2) Act, 2019, No. 23, Acts of Parliament, 2019 (India). [4] Section 2(11), The Finance (No. 2) Act, 2019, No. 23, Acts of Parliament, 2019 (India). [5] 1st Schedule, Part III, Paragraph E(II)(ii), The Finance (No. 2) Act, 2019, No. 23, Acts of Parliament, 2019 (India).

[6] Ministry of Legal Updates, Draft of Direct Tax Code, Law Ministry (May 06, 2010, 10:20), https://lawministry.in/download-direct-tax-code-2019-draft-pdf/.

[7] The cost incurred by the taxpayers while adhering to the obligations prescribed by the tax legislations are the compliance cost.

[8] PRS, The Taxation Laws Amendment Bill, 2019, Prs legislative Research (May 06, 2020, 12:45), https://www.prsindia.org/billtrack/taxation-laws-amendment-bill-2019.

[9] Budget Speech, Union Budget 2015-16, (May 05, 2020, 09:45), https://www.indiabudget.gov.in/doc/bspeech/bs201516.pdf.

[10] The tax rate which is imposed on the net income of the company is called corporate tax-rate.

[11] Discussion Paper, Direct Taxes Code, Ministry Of Finance (May 06, 2020, 08:45), https://www.prsindia.org/sites/default/files/bill_files/Discussion_Paper.pdf.

[12] Section 115BAB, The Taxation Laws (Amendment) Act, 2019, No. 46, Acts of Parliament, 2019 (India).

[13] Section 10AA, Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[14] Section 32(1)(iia), Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[15] Section 33ABA, Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[16] Sections 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB), Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[17] Section 35CCC, Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[18] Section 35CCD, Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[19] Section 32(1)(iia), Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[20] Section 33AB, Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[21] Section 35AD, Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[22] supra note 4.

[23]Section 115BAB(5), The Taxation Laws (Amendment) Act, 2019, No. 46, Acts of Parliament, 2019 (India).

[24] Section 8(b)(ii)(aa)(i), The Finance (No. 2) Act, 2019, No. 23, Acts of Parliament, 2019 (India).

[25] Section 115BAB(2)(b), The Finance (No. 2) Act, 2019, No. 23, Acts of Parliament, 2019 (India).

[26] The companies opt for reconstruction of businesses for reducing the cost, for merging with another company, for incorporation of latest technologies etc.

[27] supra note 8.

[28] Id. [29] 63 Peter R. Merrill, Corporate Tax Policy for the 21st Century, 63 N. T. J 623-633 (2010). DISCLAIMER: Views and opinions as expressed in the Research Articles are solely of the author and any member of the core team of the website shall not be liable for the same.

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