Govt lists activities that will not qualify for lower corporate tax scheme

The government has listed the items whose manufacture will not allow units to qualify for the 15 per cent corporate tax scheme. Further, the entities opting for the reduced tax rate of 22 per cent cannot claim any exemption or incentives, including accumulated Minimum Alternate Tax (MAT) credit.

Software development, book printing, mining, conversion of marble blocks and bottling of gas into cylinders are excluded from the definition of manufacturing.

This is part of the Taxation Laws (Amendment) Bill introduced by Finance Minister Nirmala Sitharaman (pictured) on Monday in the Lok Sabha, to replace the ordinance on a lower corporate tax rate, aimed to stimulate growth in a slowing economy. The ordinance was issued on September 20, cutting the base corporate tax rate to 22 per cent, from 30 per cent. 

Under the amended rules, losses/unabsorbed depreciation accruing to a company due to merger shall not be given effect to for availing of the 22 per cent rate. Short-term capital losses on non-depreciable assets shall be taxed at 22 per cent. Where any conditions are violated, the reduced rate shall not be allowed in that year and any subsequent year. Besides, the government has reserved the authority to specify any industry that can be denied the concessional rate of 15 per cent. 

A new provision is being inserted in the Income Tax Act to provide that with effect from the current financial year (2019-20), a domestic company may opt to pay tax at 22 per cent plus surcharge at 10 per cent and cess at 4 per cent if it does not claim any incentive/deduction. The effective rate for these companies comes to 25.17 per cent and they are not subject to MAT. 

“Creasing out the interpretational issues arising from the ordinance, the Act has added necessary provisos and subsections. Foremost is the amendment in 115JAA, legislating that MAT credit shall not be available where the beneficial rate of tax is claimed. The Act has put an end to possible litigation on the applicability of the Central Board of Direct Taxes (CBDT) circular which was issued to clarify that MAT credit shall not be allowed,” said Rakesh Nangia, chairman, Nangia Andersen Consulting.

Further listing the activities that shall not be deemed as manufacturing to claim the reduced rate of 15 per cent, the Act has restricted the benefit. Clarifying that the surcharge of 10 per cent shall apply to those claiming the beneficial rate under the new sections, speculations on that front have also been removed, he said. 

Further, the government has proposed to authorise CBDT to issue guidelines for the purpose of removing any difficulty and to promote manufacturing or production of an article or thing using new plant and machinery.

“There was controversy as to what all activities could constitute manufacturing. Some of the items like software development, etc, have been clarified, that those will not qualify, and that the government may notify other such activities as well. There is a positive that companies held invalid to avail of the 15 per cent tax rate shall be allowed to avail of the 22 per cent rate,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates.