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(Last Updated On: March 2, 2017)

Suggestions on Paragraph E of Part III to the First Schedule of Finance Bill 2017- Reduction in corporate tax rate – Reduced corporate tax rate to be applicable for erstwhile firms recently converted into companies and also LLPs and companies which were set up subsequent to F.Y.2015-16

The Finance Bill, 2017 proposes a concessional rate of 25% in case of domestic companies whose total turnover or gross receipts of previous year 2015-2016 does not exceed Rs.50 crore. [Read Income tax for smaller companies reduced ,NPA provisions increased -Budget 2017-18 ]

The Notes on clauses to the Finance Bill, 2017 dealing with relevant provision reads as follows:

`Paragraph E of this Part specifies the rates of income-tax in case of companies. In the case of domestic companies the rate of income-tax shall be twenty-five per cent of the total income where the total turnover or gross receipts of previous year 2015-2016 does not exceed fifty crore rupees and in all other cases the rate of income-tax shall be thirty per cent of the total income. In the case of companies other than domestic companies, the rate of tax will continue to be the same as that specified for assessment year 2017-2018…’

The Hon’ble Finance Minister, in his Budget speech explained the rationale of provision of such concessional rate, namely, to make Micro, Small and Medium companies more viable and also to encourage firms to migrate to company format.

Issues :

(i) Since the intent behind the proposed amendment is to encourage firms to migrate to company format, it appears that in case of firms which have been subsequently converted into domestic companies, the turnover of the firm for P.Y.2015-16 would be considered for application of concessional rate of tax for the company for A.Y.2018-19, i.e., a firm/LLP which had turnover/gross receipts of Rs.50 crores or less in P.Y.2015-16 would also be eligible to claim benefit of 25 per cent tax rate for A.Y.2018-19. To ensure clarity regarding this legislative intent, appropriate clarification may be inserted in the Act to this effect.

(ii) Also, a situation may arise where a company was in existence in P.Y. 2015-16 but the business had not commenced as at 31st March 2016, consequent to which there was no turnover during that year.

In such a case also, the company should be eligible for a concessional rate of tax@25% during the A.Y.2018-19.

(iii) A company which has been set up in P.Y.2016-17 or P.Y.2017- 18 should also be eligible for the concessional rate if its turnover during the said years is upto Rs.50 crores. Appropriate provisions need to be incorporated for the same.

(iv) In order to encourage LLP form of organization, which is preferred over company form due to fewer compliances, the concessional rate of tax may be extended to LLPs with turnover of upto Rs.50 crores.

Suggestions:

It is suggested that:

a. In line with the Finance Minister’s speech and his intention to provide the beneficial tax rate of 25 per cent to firms that migrate to company format, it may be clarified that such benefit is available to those companies that existed as firms during the P.Y.2015-16 and subsequently converted into companies.

b. Companies which were in existence during the P.Y.2015-16 but had not commenced business in that year also should be eligible for the beneficial tax rate of 25 per cent on the basis of the turnover of P. Y.2016-17.

c. A company which has been set up in P. Y.2016-17 or P. Y.2017-18 should also be eligible for the concessional rate if its turnover during the said years is upto Rs.50 crores.

d. In order to encourage LLP form of organization, which is preferred over company form due to fewer compliances, the concessional rate of tax may be extended to LLPs with turnover of upto Rs.50 crores.

e. Appropriate provisions may be incorporated to give effect to the above.