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India to enact tax breaks for domestic companies

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Tax Hot Topics newsletter The Taxation Laws (Amendment) Ordinance, 2019 was promulgated by Indian President Ram Nath Kovind on Sept. 20, 2019. It provides an option for domestic companies to pay corporate income tax at a lower rate, effective as of April 1, 2019.

Under Article 123 of India’s Constitution, the tax ordinance is required to be approved by the Indian Parliament within six weeks of its reassembly. Parliament returns from recess in early December, and it is highly unlikely that the tax ordinance would face any challenge in being approved.

For purposes of U.S. generally accepted accounting principles (U.S. GAAP), the legislation should not be considered enacted until the date of parliamentary approval. For International Financial Reporting Standards (IFRS) purposes, the tax ordinance might be considered substantively enacted as of Sept. 20, 2019, given the high likelihood of approval.

The tax ordinance provides an option to existing domestic companies to pay corporate income tax at a rate of 22% instead of the current 25%/30% rate, subject to the condition that they do not avail any of the specified exemptions or incentives. Further, the minimum alternative tax (MAT) is not applicable to companies choosing the lower tax rate option. The effective rate for domestic companies choosing this option will be 25.17% inclusive of prevailing surcharges and cess (tax on tax).

New domestic manufacturing companies incorporated on or after Oct. 1, 2019, and commencing production on or before March 31, 2023, are provided another option. These companies can pay corporate income tax at a rate of 15%, subject to the condition that they do not avail any of the specified exemptions or incentives. MAT also is not applicable to these companies. For companies choosing this option, the effective rate will be 17.16% inclusive of prevailing surcharges and cess.

If these options are not available or not chosen, the effective rate for domestic companies subject to the 30% income tax rate can vary from 29.12% to 34.94% (if annual turnover exceeds INR (Indian rupee) 4 billion, or approximately U.S. $56.4 million at prevailing exchange rates). These effective tax rates are inclusive of prevailing surcharges and cess. However, the MAT rate for these companies is reduced from 18.5% to 15%.

The tax ordinance does not change the corporate income tax rate for foreign companies, including branches and permanent establishments. Accordingly, such rate remains at 40% (exclusive of surcharges and cess).

U.S. GAAP requires that the effects of a change in tax law or rates be recognized in the period that includes the enactment date. It also requires that the measurement of current and deferred taxes be based on elections available under enacted tax law that are expected to be made for tax purposes.

Accordingly, if and when the tax ordinance is approved by Parliament, a company will be required to evaluate whether the option to pay a lower income tax rate is expected to be made in computing its tax provision, beginning with the interim period which includes the date of parliamentary approval. If this expectation exists as of the end of the interim period which includes the date of parliamentary approval, the tax effect of the retroactive reduction in the tax rate as of April 1, 2019, on current and deferred tax assets/liabilities existing as of the date of parliamentary approval should be included in income from continuing operations in such interim period.

If this expectation does not exist as of the end of the interim period which includes the date of parliamentary approval, a company should continue to use the corporate income tax rates in existence prior to enactment of the tax ordinance. If this expectation changes in a subsequent interim period, the change should be based on new information becoming available to the company in order to account for the effects of the change as a change in estimate. Otherwise, if based on a new evaluation of information that was available to the company in the interim period which includes the date of parliamentary approval, the effects of such change might constitute a correction of an error.

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