Union Budget 2023 Wishlist: Corporate Taxation
The Union Budget 2023 is being presented in the midst of an uncertain and slowing global economy with India emerging as the fastest growing large economy and the “bright spot”. The geo-political developments and dynamic leadership in India has made India the most preferred global investment destination. The corporate tax collections have increased dramatically despite lowering of corporate tax rates. In this backdrop, it is expected that the Union Budget will fully leverage this unprecedented opportunity for India by measures which would boost growth, employment and new investment.
Extension of Lower Tax Rate of 15% for New Manufacturing Domestic Companies under Section 115BAB
As per the provisions of Section 115BAB of the Income-tax Act, 1961 (IT Act), new domestic manufacturing companies 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 manufactured or produced by them and incorporated on or after 1 October 2019, have an option to pay tax at a lower effective rate of 17.16% (i.e. (15% basic tax + 10% surcharge) + 4% cess)} subject to fulfillment of specified conditions.
Companies opting for this section would not be required to pay Minimum Alternate Tax (MAT) but are not eligible to claim majority of the deductions available to other business assessees. One of the conditions prescribed under this section is that the companies must commence their production on or before 31 March 2024. India is emerging as the preferred manufacturing destination as most global companies are looking at broad basing their manufacturing locations in view of the geo-political developments. In recent times, several global companies in electronics, auto and engineering sectors have announded mega investment plans for India for manufacturing projects. Most manufacturing projects have long gestation periods ranging from 1 year to 3 years.
Therefore, it is widely expected that the sunset date for commencing manufacturing activity would be extended by 2 years to 31 March 2026 so as to boost the new manufacturing companies
New Concessional Tax Regime for Service sector
Section 115BAB of the IT Act has offered concessional rate of tax to domestic manufacturing companies so as to boost the economic and manufacturing activities in India. However, the present tax laws do not offer any concessional tax regime for the services sector despite high employment propensity. Also, the prevailing tax holiday u/s 10AA has also expired for units in Special Economic Zones
Hence, it is expected that new concessional tax regime @ 20% (plus surcharge and cess) should be provided to the service sector.
Deduction in respect of Employee Costs – Section 80JJAA
Under section 80JJAA of the IT Act, assessees can claim a deduction of 30% of employee cost incurred on hiring new employees for 3 assessment years, provided the conditions mentioned therein are satisfied. One of the prescribed conditions is that the total emoluments paid to new employees are upto Rs. 25,000 per month. Such limit has not been revised since its introduction in Finance Act 2016.
Given our large workforce and need for massive employment generation, it is necessary to incentivize businesses that generate employment for the lower and mid-level wage and salary levels. It is also widely known that increased employment has a multiplier effect on the economic growth.
Considering the above and the inflation in the last 7 years, it would be a great initiative to increase threshold limit of emoluments from the present Rs.25,000 per month to Rs. 50,000 per month for the purpose of deduction under section 80JJAA.
Tax on Dividends Distributed by Domestic Companies to be Restricted to 20%
Under the existing provisions of the IT Act, there is a double taxation of income in case of companies – firstly the companies pay corporate tax and then the shareholders pay tax on the dividends. In case of resident individual shareholders, the tax on dividends can be as high as 35.88%. On the other hand, non-residents are liable to tax on dividends @ 20% (plus surcharge and cess) which gets further lowered by Double Tax Avoidance Agreements to 5%-15%.
In order to reduce the cascading effect of double taxation, it is expected that the maximum tax on dividends distributed by domestic companies in case of resident shareholders is limited to 20% (plus surcharge and cess).
Reduction in Tax Rate for Partnership Firms and LLPs
Small and medium enterprises generally prefer Partnership Firms or LLPs as compared to companies due to ease of formation, reduced statutory obligations, lesser compliances, etc. However, they are very unfavorable from taxation perspective as compared to corporates where the rates of tax generally range from 17.16% to 25.17% (including the applicable surcharge and cess) under the new optional corporate tax regime and new manufacturing companies tax regime.
Partnership Firms and LLPs are taxed at a flat rate of 30% (plus surcharge and cess) which may effectively result in a rate as high as 34.944%. At the same time, there is no tax on distribution of profits in case of partnership firms and LLPs whereas in case of companies, dividends are taxed in the hands of the shareholders. There is a need to reduce the disparity with the corporates and to incentivize the small and medium sized businesses. Thus, it is expected that the tax rate for firms and LLPs would be reduced to 25% (plus surcharge and cess).
Deduction of expenditure incurred on Corporate Social Responsibility (CSR) required under section 135 of the Companies Act
Under the existing provisions of the Income Tax Act, 1961 (‘IT’ Act’), Explanation 2 to section 37(1) explicitly disallows expenditures incurred by an companies on activities relating to corporate social responsibility (CSR) as referred to in section 135 of the Companies Act 2013. The company law regulations impose statutory obligation on certain companies (such as companies having average annual profits of Rs. 5 crores) to spend at least 2% of the average net profits of company made during the 3 immediately preceding financial years in India on CSR activities. This provision has gone a long way in improving the socio-economic situation and upliftment of the lower strata of the society and is a statutory obligation.
In view of the above, there is an expectation that CSR expenses should be allowed as tax deduction and for this purpose, omit Explanation 2 to section 37(1) of the IT Act.
Scope of Safe Harbour Regulations for Transfer Pricing to be expanded to include more Industries
The transfer pricing regulations have resulted in vast number of tax disputes and is one of the uncertainties companies having global operations are concerned about. With the objective to reduce litigation pertaining to international transactions conducted between Associated Enterprises, the income tax authorities, in 2015 had introduced the Safe Harbour Regulations for the purpose of determining arm’s length price. Presently, the scope of such regulations is limited to very few sectors and industries such as IT industry, back-office services and auto sector and have greatly reduced disputes. Due to its ease of applicability and acceptance from Indian Revenue Authorities, more industries should be brought within the purview of these rules.
Hence, to ensure certainty for the taxpayers and reduce litigation with tax authorities, the scope of Safe Harbour Regulations for Transfer Pricing should be expanded to include more industries and sectors such as electronics, metallurgical industries, engineering industries and distribution companies.
Removal of Tax on Notional Income in Respect of Shares and Property Transactions
In the existing Indian tax laws, there are several provisions which charge tax on the notional income which result in undue hardship and are against the concept of taxation of “real income”. Some of them are detailed below:
- Section 56(2)(x) of the IT Act:
As per the said section, if a person receives any movable property without consideration or for inadequate consideration, and the difference between the fair market value (FMV) and actual consideration exceeds Rs. 50,000, such difference would be taxable as gift in the hands of the recipient. This includes the receipt of shares at a price below the adjusted book value of the shares of a company. It is well known that the market value of the shares can be below book value particularly in case the industry or company outlook is not encouraging. The objective of this provision was to avoid tax avoidance but this has hampered many genuine business transactions.
Section 23(5) of the IT Act:
Section 23(5) of the IT Act charges Notional Rent in the hands of the assessee holding Immovable property as stock-in-trade after the expiry of 2 years from the end of the financial year in which the construction was completed. Such unsold inventory could be due to certain inevitable reasons such as market conditions or the stamp duty valuation being higher than the prevailing market price.
Although such provisions are meant to be anti-abuse, several genuine business transactions are impacted adversely. Hence, in such cases, the provisions should be invoked only where the assessee is unable to establish the genuineness of the transactions.
Allowing successors of amalgamation, demerger or any other reorganization to carry forward benefits of MAT Credit
Currently, the provisions of the IT Act do not provide any clarity regarding carry forward of Minimum Alternate Tax (MAT) credit of a predecessor company by a successor company on account of amalgamation, demerger or any other form of reorganization. Many judicial authorities have ruled that such carry forward of MAT is permitted, but the same still remains controversial in the absence of any specific clarification.
Therefore, it is expected that the amendments to the provisions of the IT Act shall be made so as to enable the successors to carry forward MAT Credit of the predecessor company in case of eligible mergers, demergers and eligible forms of re-organizations.
Concessional rate of tax for Rupee denominated External Commercial Borrowings (ECBs)
As per the provisions of section 194LC of the IT Act, a specified company or a business trust while making payment for any specified interest income payable to a non-resident assessee deduct the TDS thereon at the rate of 5%. Such Concessional rate of tax of 5% is available for borrowings made in foreign currency under ECB route only and does not extend to Rupee denominated ECBs.
Considering the liberalized ECB framework for INR denominated ECBs and the volatile foreign exchange rates, it is recommended that the Central Government must take a step forward to make Rupee Denominated ECBs more lucrative by extending the benefit of concessional tax rate of 5% on interest under section 194LC to them.
Tax on Buy-back of shares under section 115QA be rationalised for listed companies
As per the provisions of section 115QA of the IT Act, while doing buy-back of shares, a domestic company is liable to pay tax on the distributed income (i.e. consideration paid by the company on buy-back as reduced by the amount received by the company at the time of issue of shares). These provisions were made applicable even to listed companies w.e.f. 5th July 2019.
Listed shares are transacted frequently and the shareholder transferring the said shares is liable to pay tax under the head capital gains on the value of appreciation each time a transfer takes place. Hence, the difference between the buy-back price and purchase price of such shares is the real income in the hands of the shareholder. However, buyback tax is levied on the entire difference between the buy-back price and the issue price which conveniently ignores the intermediary transactions and tax thereon paid by the shareholders who have transacted the shares between the date of issue and the date of buyback. Thus, this results into double taxation on the same income.
Hence, akin to tax on dividend, it is expected to delete section 115QA and section 10(34A) and tax the gain resulting on buyback directly in the hands of the respective shareholders whose shares are acquired under the buyback based on the buyback price and the cost of acquisition of shares for such shareholders.
Section 43B - Clarification regarding deduction on payment of interest only on actual payment - Need to provide carveout for conversion in genuine cases like conversions under IBC, 2016
The Finance Act 2022 amended Explanations 3C, 3CA and 3D of section 43B of the IT Act wherein it disallowed interest which is payable on loan or borrowing from specified financial institution/ NBFC/ scheduled bank or a cooperative bank even in cases where such interest is converted to a debenture or any other instrument by which the liability to pay is deferred to a future date.
The said amendment inadvertently affects the debt-ridden companies that enter into arrangement with financial institutions for recasting their loan or outstanding interest into convertible, non-convertible debentures or at time equity instruments, etc. This covers genuine and bona fide transactions and may result in a situation where the deduction for interest on original loan converted into debenture may never get allowed in perpetuity.
Hence, in order to provide relief to the assessees from this genuine hardship, it is sought that the aforementioned amendments must be reconsidered along with providing for a suitable exception for conversion effected under the Corporate Insolvency Resolution Process [‘CIRP’] under the Insolvency and Bankruptcy Code (IBC), 2016.
Onerous Form 15CA/15CB compliance in respect of dividend payment to Non-Resident [Rule 37BB of Income Tax Rules, 1962]
In accordance with Rule 37BB of the IT Rules, every person before making any payment to a Non-Resident is required to furnish information in Form 15CA as well as obtain a CA certificate in Form 15CB to its Authorized Dealer Bank (AD Bank). Such forms must be uploaded on the e-filling portal for each of the Non-resident.
In case of remittance of dividends, this can practically be very tedious and at times impossible for large entities with thousands of foreign shareholders considering the quantum of time available. Form 15CA is merely a declaration of appropriate collection of TDS and is used as an information collecting tool. Thus, as long as the company deducts and deposits TDS at the time of payment of dividend to non-resident shareholders, again collecting the said information through Form 15CA which is already obtained by Income Tax authorities through TDS returns, merely adds compliance burden for the Indian remitter.
Hence, in our view, the Income Tax Authorities must set a threshold limit (say Rs. 50,000) in case of remittance of dividend and mandate furnishing of Form 15CA /Form 15CB only if the said payment exceeds the prescribed threshold limit to reduce the compliance burden.