In a bold move to enhance economic development, the Indian Government announced on September 20, 2019, new tax legislation to significantly reduce the corporate income tax rate for some Indian companies. In addition, the new legislation repeals the higher surcharge tax applicable to non-corporate taxpayers on certain capital market transactions and provides for an exemption from the share buyback tax for listed Indian companies that announced share buybacks prior to July 5, 2019, but had not completed the share buyback by that date.
Reduction of the corporate income tax rate for Indian companies
Indian companies can elect for taxable years beginning after April 1, 2019 to apply a 22% corporate income tax rate. As a result of making the election, most tax exemptions or incentives can no longer be claimed. The election, once made, cannot be revoked in subsequent years. In addition, electing companies are exempt from the Minimum Alternate Tax.
Lower corporate tax rate benefits new manufacturing companies
In order to increase the Indian manufacturing base, Indian companies incorporated on or after October 1, 2019 who commence manufacturing operations on or before March 31, 2023 can elect to apply a 15% corporate income tax rate. Once the election is made, most tax exemptions or incentives can no longer be claimed. In addition, the election is subject to meeting certain company formation and other conditions. The election cannot be revoked in subsequent years. Companies making the election are also exempt from Minimum Alternative Tax.
Reducing in the Minimum Alternative Tax rate
The Minimum Alternative Tax rate is reduced from 18.5% to 15% for all other companies.
Repeal of the increased surcharge on capital gains
The 2019 Indian Budget increased the surcharge rates for certain non-corporate taxpayers; however, the increased surcharge has been repealed for: (i) non-corporate taxpayers deriving capital gains from the transfer of listed equity shares, units of equity-oriented funds, and business trusts when such transfers are subject to the securities transaction tax; and (ii) foreign portfolio investors who derive capital gains from the transfer of any securities.
Exemption from the share buyback tax
In addition, the 2019 Indian Budget expands the application of the share buyback tax to listed Indian companies for share buyback transactions occurring on or after July 5, 2019. It should be noted, the tax does not apply to share buybacks of listed companies that were announced prior to July 5, 2019 but were not completed by that date.
About the Author
James Dawson is an experienced international business and tax advisor to growing global enterprises. His focus is on both U.S. and foreign tax planning, structuring of international operations, cross border transactions, project management and coordination of services in foreign jurisdictions.