Lower Corporate Tax Rates in India

How to opt for New Scheme and How it is beneficial compared to other structures?

In our earlier article under the head “Recent Amendment in Corporate Tax rates made India attractive jurisdiction in Tax perspective”, we laid emphasis on and discussed in brief about the pertinent and immense steps undertaken by the Government of India to promote foreign investments and growth in the Indian economy through the introduction of the Taxation Laws (Amendment) Ordinance, 2019 (‘the Ordinance’) which reduced the Corporate Tax Rates for domestic companies to 22% (15% in case of new manufacturing companies).

The reduced Corporate Tax rate has made India an attractive jurisdiction from the tax perspective and competitive with other Asian countries such as Hong Kong (16.5%), Singapore (15%), Thailand (20%), Vietnam (20%), Malaysia (24%), Indonesia (25%), China (25%), South Korea (25%) and Japan (30.62%). In our earlier article, we concluded that with the reduction of corporate tax rate:-
  • Many foreign companies may consider India as Manufacturing or Trading hub for undertaking investments and businesses in Asian markets.
  • Many foreign companies may consider setting up their subsidiaries with a legal structure of a domestic company instead of Limited Liability Partnership (LLP) (as reduced Corporate Tax Rate is not applicable to Limited Liability Partnerships)
In this article we will analyse how foreign companies can opt for the scheme for lower deduction of corporate tax rate and why it is beneficial to set up a company in India in comparison with an LLP post COVID-19.

How to opt for New Scheme?

Section 115BAB and section 115BAA were inserted vide the Taxation Laws Amendment Act, 2019 w.e.f. April 01, 2020 in respect of new scheme of lower corporate tax rates.

Section 115BAB provides that the company registered in India on or after 1st October’ 2019 and commenced the manufacturing on or before 31st March’ 2023, satisfying relevant conditions has an option to pay tax at a rate of 15% plus relevant surcharge & cess (effective rate-17.01%) with no MAT.  However, Section 115BAA provides that the company registered in India and satisfying the relevant conditions, has an option to be paying tax at 22% with no MAT from the financial year 2019-20 onwards.

The Government of India vide notification 10/2020 dated February 12, 2020 (“the Notification 10/2020”) has laid down the rules to exercise the option to avail lower corporate tax rates in terms of Section 115 BAB and 115 BAA.

Steps to opt for new scheme of lower tax under Section 115BAB (i.e. Lower Tax rate @15%)
  1. Relevant Rule:- Rule 21AF under Income-tax Rules, 1962
  2. Relevant Application to exercise option :- Form No. 10-ID. The option in Form No. 10-ID shall be furnished electronically either under digital signature or electronic verification code.
  3. Application to be made before:- The Assessing Officer (AO) of respective jurisdiction
  4. Relevant year for which application can be made:- Any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall be in Form No. 10-ID.
  5. Relevant details to be furnished:- Name of the company, whether a domestic company, PAN number, registered address, date on which company was set up and registered, nature of business or activities, date of commencement of manufacturing/production.
  6. Change of Option:- Once exercised for any previous year, the same cannot be subsequently withdrawn for the same or any other previous year.
  7. Relevant Declaration:- Namely:-
    1. the business has not been formed by splitting up or reconstruction of a business already in existence except for as provided in section 33B.
    2. the company does not use any machinery or plant previously used (exception provided under the Income Tax Act 1961).
    3. the company does not use any building previously used as a hotel or convention centre, in respect of which the deduction under section 80-ID has been claimed and allowed.
    4. the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such an article or thing manufactured or produced by it as mentioned in Form 10-1D
Steps to opt for new scheme of lower tax under Section 115BAA (i.e. Lower Tax rate @22%)
  1. Relevant Rule:- Rule 21AE under Income-tax Rules, 1962
  2. Relevant Application to exercise option :- Form No. 10-IC. The option in Form No. 10-IC shall be furnished electronically either under a digital signature or an electronic verification code.
  3. Application to be made before:- The Assessing Officer (AO) of the respective jurisdiction
  4. Relevant year for which application can be made:- Any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall be in Form No. 10-IC.
  5. Relevant details to be furnished:- Name of the company, whether a domestic company, PAN number, registered address, date of incorporation, nature of business or activities, relevant details in case company has any unit in International Financial Services Centre (IFSC), withdrawal of option if exercised in Form. No. 10IB for any previous year or subsequent years.
  6. Change of Option:- Once exercised for any previous year, cannot be subsequently withdrawn for the same or any other previous year.
How setting up Company is beneficial compared with LLP?

Company in comparison with LLP – Which structure is beneficial?

Prior to the introduction of the lower corporate tax rate , the tax rate for companies as well as for LLP’s was 30% plus surcharge and cess. Consequently, earlier, LLP was a much more favourable option considering the fact that companies had to bear tax on dividend additionally.

Thus, now, for an existing company, opting to shift under the 22% tax regime with no MAT, there may be cases where the company would prove as a productive and worthwhile option. However, the  same needs to evaluated on a case to case basis.