Understanding the Corporate Tax Structure for Domestic Startup Companies

To address the slowdown in the economy, the Finance Minister recently announced a swerve of measures. These include the slashing of tax rates applicable on domestic companies and newly incorporated manufacturing companies. The Taxation Laws (Amendment) Ordinance, 2019 was promulgated on September 20, 2019. The Ordinance amends the Income Tax Act, 1961, and the Finance (No. 2) Act, 2019.  The Ordinance provides domestic companies with an option to opt for lower tax rates, provided they do not claim certain deductions.  It also amends certain provisions regarding levy of surcharge on income from capital gains.

The tax rate on companies have been revised in the following manner:

++: Surcharge plus Cess

• Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 12% of such tax, where total income exceeds ten crore rupees. However, the rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BAB shall be 10% irrespective of amount of total income. The surcharge shall be subject to marginal relief, which shall be as under:

i.      Where income exceeds INR 1 crore but not exceeding INR 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of INR 1 crore by more than the amount of income that exceeds INR 1 crore

ii.    Where income exceeds INR 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of INR 10 crore by more than the amount of income that exceeds INR 10 crore

• Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge

*      Prescribed manner of determining total income for the purpose of section 115BAA or section 115BAB:

The total income of the company should be computed:

• Without claiming deduction under the following provisions:

a.      Section 10AA of the Act relating to newly established units in Special Economic Zones

b.      Additional depreciation allowance under section 32(1)(iia) of the Act

c.       Section 32AD of the Act – Deduction for investment in new plant and machinery in notified backward areas in certain States

d.      Section 33AB of the Act – Concerning Tea/ coffee/ rubber development account

e.      Section 33ABA of the Act – Site restoration fund

f.       Sections 35(1) (ii), (iia), (iii) and 35(2AA), (2AB) of the Act – certain scientific research expenditure

g.      Section 35AD of the Act – Deduction in respect of expenditure on specified business

h.      Section 35CCC of the Act – Expenditure on agricultural extension project

i.        Section 35CCD of the Act – Expenditure on skill development project

j.        Deduction under Part C of Chapter VIA other than section 80JJAA of the Act (deduction in respect of employment of new employees)

• Without set-off of any loss carried forward from an earlier year to the extent that such loss is attributable to any of the deduction mentioned above
• By claiming depreciation under section 32 other than additional depreciation under section 32(1)(iia) of the Act determined in such manner as may be prescribed

What it means for Startups?

• Startup Company engaged in manufacturing/ production and set-up and registered on or after 1 March 2016:

a.      Pay tax at base rate of 25% after availing exemptions or deductions specified in the above section. MAT at base rate of 15% will be applicable

b.      Pay tax at base rate of 22%, without availing any exemptions or deductions. MAT will not be applicable

• Startup Manufacturing Firm incorporated after October 1, 2019 and beginning operations before March 31, 2023

a.      That does not avail exemption or incentive, to pay tax at base rate of 15%. MAT will not be applicable

b.      That avails exemption or incentive, to pay tax at base rate of 25%. MAT at base rate of 15% will be applicable

• Startup Companies, other than the above, have two options:

a.      Pay tax at base rate of 22%, without availing any exemptions or deductions. MAT will not be applicable

b.      Pay tax at base rate of 25% after availing exemptions or deductions specified in the above section. MAT at base rate of 15% will be applicable

Macro level Impact

The major tax rate cut offered for setting up new manufacturing firms will act as a key incentive for the expansion and growth of the manufacturing sector in the Country, thereby boosting Make in India. It would also encourage foreign companies to set up manufacturing units in the Country as their entities in India are classified as domestic companies for the purpose of taxation and can thus enjoy the benefit of lower taxation rates.

The tax relief will further encourage private companies to redirect their savings from the saved tax outflow into capital expenditure, business expansion and declaration of dividends through higher profit margins or pass back the benefits to the consumer to bring back the demand.

The reduction in corporate tax rate and other reliefs announced will cost the government a revenue loss of INR 1.45 lakh Crore.