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Update

Taxation: Legal Milestones in 2019 and a Look Ahead

28 Feb 2020

Tax Updates
The year 2019 witnessed key changes to the GST regime, cross-border taxation framework and tax incentives for manufacturing companies and start-ups. This update summarises some of the major developments in the past year and gives a brief overview of what can be expected in 2020.

THE YEAR THAT WAS

The taxation regime witnessed some significant developments in 2019. Preferential corporate tax rates were introduced for new manufacturing companies. Further, to incentivise the financial sector and boost the economy, Category II AIFs were exempted from angel tax. Buy-back tax for listed companies was also introduced to plug the loophole available to listed companies that chose buy-back as a more tax-efficient option over distribution of dividends.

On the indirect tax front, certain amendments to streamline the existing indirect tax provisions were made. Also, the year 2019 saw landmark judgments from the apex court that are likely to have a far-reaching impact.

MAJOR DEVELOPMENTS IN 2019

  • Direct Tax
    • Rationalisation of corporate tax rates

      The Government has amended the income tax rates applicable to existing domestic companies and new domestic manufacturing companies (set up and registered on or after 1 October 2019 and commencing manufacturing on or before 31 March 2023). These companies can opt for concessional tax rates of 22% and 15% respectively with effect from assessment year (AY) 2020-21. The effective tax rate including applicable surcharge and cess for existing domestic companies and new domestic manufacturing companies opting for the concessional rates will be 25.17% and 17.16% respectively. However, this comes with the stipulation that such companies will not avail of specified exemption/incentives. Further, companies opting for concessional tax rates will not be required to pay any Minimum Alternate Tax (MAT).

    • Introduction of e-assessment procedure

      The Government has tried to infuse greater efficiency and transparency in the assessment process by introducing e-assessment procedure in 2019. To facilitate e-assessment proceedings, specialised units were created by the CBDT at national and regional levels.

      However, while this initiative takes effect for assessments beginning from the financial year 2019-20, it is still at a nascent stage and initial hiccups and technical glitches cannot be ruled out.

    • Introduction of tax on distributed income (buy-back) of shares in case of listed companies

      The Finance Act 2019 introduced a levy of buy-back tax on listed companies undertaking a buy-back to avoid payment of Dividend Distribution Tax. Further, upon buy-back tax being paid by the listed company, the shareholders of such listed company will not be subject to tax on receipt of proceeds from such buy-back.

    • Notification of Multilateral Convention to implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – the Multilateral Instrument (MLI)

      India has been a signatory to MLI which is applied alongside existing tax treaties and seeks to curb revenue loss through treaty abuse and base erosion and profit shifting strategies. However, for MLI to come into force, both parties to the tax treaty need to convey their intention by way of a notification.

      The year 2019-20 witnessed notification of the applicability of MLI provisions to several tax treaties. The MLI provisions were made applicable for India’s treaty with Singapore and UAE from 1 October 2019 and will be applicable for India’s treaties with Japan and UK from 1 April 2020.

    • Direct tax jurisprudence
      • Characterisation of research and information services as knowledge process outsourcing (KPO)

        Recently, the Supreme Court dismissed a special leave petition filed by McKinsey India against the Delhi High Court order characterising the research and information services rendered by it to its associated enterprise as a high-end KPO service provider.

        The company considered itself a routine business process outsourcing service (BPO) provider. The determination was contentious because the benchmarking and mark-up from a tax perspective is done differently for a BPO and KPO.

        While pronouncing the judgement the High Court noted that the services rendered by McKinsey India were specialised and required specific skill-based analysis and research that was beyond the more rudimentary nature of services rendered by a BPO. The High Court therefore concluded that it would be incorrect to slot the services provided by McKinsey India into that of a BPO when it is more akin to a KPO.

        This ruling by the Supreme Court upholding the High Court’s order further underlines the importance of correct classification of activities by outsourcing companies in India.

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