One year extensions: Concessional 15% corporate tax rate for new manufacturing cos, startup sops

Section 115BAB of the Income-tax Act provides for an option of concessional rate of taxation at the rate of 15 per cent for new domestic manufacturing companies, provided that they do not avail themselves of any specified incentives or deductions and fulfill certain other conditions. The Act provides that the new domestic manufacturing company is required to be set up and registered on or after October 1, 2019 and is required to commence manufacturing or production of an article or thing on or before March 31, 2023, according to the Budget document.

Sitharaman also offered sops for start-ups by extending the date of incorporation for eligible startups for exemption. The existing provisions of the Section 80-IAC of the Act provide for a deduction of an amount equal to 100 per cent of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of 10 years, beginning from the year of incorporation, at the option of the assesses.

Due to the Covid pandemic, there have been delays in setting up such units. In order to factor in such delays and promote such eligible startups, the government has proposed to amend the provisions of Section 80-IAC of the Act to extend the period of incorporation of eligible start-ups to March 31, 2023, according to the Budget document.

The government has revised upwards the direct tax collection estimates for 2021-22 fiscal from Rs 11.08 lakh crore in Budget estimates (BE) to Rs 12.50 lakh crore in revised estimates (RE). The government expects to collect Rs 6.35 lakh crore from corporate taxes and Rs 6.15 lakh crore from personal income taxes (PIT) as against the budget estimate of Rs 5.47 lakh crore and Rs 5.61 lakh crore in corporate taxes and PIT, respectively.

In most of the cases, the optional corporate tax regime has lowered the corporate tax rate to 22 per cent, plus surcharge and cess resulting, at an effective tax rate of 25.17 per cent.

Improved profitability of the corporates, formalisation of the economy and improved compliance due to tax reforms are noteworthy, the Economic Survey for 2021-22 said. The corporate income tax registered a growth of 90.4 per cent over April-November 2020 and 22.5 per cent over April-November 2019.

Further, the Budget has proposed changes on dividends of corporates.

Rohinton Sidhwa, partner, Deloitte India, said, “On withdrawal of Sec 115BBD — Indian corporates benefited from a lower tax rate on dividends of 15 per cent received from their foreign “affiliates” (where the shareholding was 26 per cent or more). This has now been withdrawn and such dividends will now be taxed at regular rates. The justification for this is being traced back to the removal of dividend distribution tax. The lower rate provided an incentive to bring back the cash to India.”

Concerns had been expressed by corporate taxpayers on the limited time available for revising tax returns, acknowledging a part of the concern the Finance Bill has proposed an extended timeline for an updated tax return.

“However, what the FM did not mention in her speech is that the same would come with an additional tax at 25 per cent/50 per cent on the tax and interest due on the additional income furnished would be required to be paid. While this does provide one more opportunity to taxpayers to ensure comprehensive reporting, is the additional tax fair and whether it would encourage voluntary tax compliance would remain to be seen,” said Pranay Bhatia, partner and leader-tax and regulatory services, BDO India.