On 20 September 2019, the Government of India announced a sweeping set of tax reforms that changed the way companies would calculate and pay income tax from FY 2019–20. The ordinance slashed corporate tax rates and introduced two new provisions, Section 115BAA and Section 115BAB, offering companies the option to adopt lower flat tax rates. This was not simply a rate cut—it was a major shift in philosophy, moving India closer to international tax standards and signalling an intent to make the country a stronger destination for investment.
The impact was immediate. Smaller companies saw tax relief of around 1–4%, while larger businesses—those with turnovers above ₹400 crores—benefitted from reductions close to 10 percentage points. At the same time, the government made it clear that these concessional rates came with trade-offs: companies would need to give up many long-standing tax deductions and incentives, and once the choice was made, it could not be reversed.
A special incentive was carved out for new manufacturing businesses incorporated after 1 October 2019. These companies could pay tax at an effective rate of just 17.16%, one of the lowest in Asia, provided they satisfied certain conditions. To ensure fairness, the Minimum Alternate Tax (MAT) was also reduced from 18.5% to 15% for companies that continued with the regular tax regime.
For India Inc., this was more than a technical adjustment to percentages. It represented a fundamental change in the cost of doing business, simplified compliance, and sent a clear message: India was ready to compete for global capital on more attractive terms.
Rate of tax (including surcharge and cess) – comparison (Normal provisions)
The most visible effect of the ordinance was in the revised tax slabs. The government structured the relief so that both small and large companies could benefit, though the scale of savings varied.
A) Companies having Turnover of less than ₹400 crores in FY 2017-18
For smaller companies, the reductions were incremental but still meaningful:
- Income below ₹1 crore: Earlier, these companies paid 26%. After the ordinance, the rate dropped slightly to 25.17%, saving 0.83%.
- Income between ₹1 crore and ₹10 crores: Their tax rate fell from 27.82% to 25.17%, a saving of 2.65%.
- Income above ₹10 crores: Tax reduced from 29.12% to 25.17%, translating into a 3.95% cut.
For many businesses in this bracket, especially mid-sized companies, even a 2–4% relief meant extra cash flow that could be used for expansion, debt repayment, or simply easing pressure on working capital.
B) Companies having Turnover of more than or equal to ₹400 crores in FY 2017-18
The real game-changer came for larger corporates, who had long complained of India’s high effective tax burden:
- Income below ₹1 crore: Dropped from 31.20% to 25.17%, a cut of over 6%.
- Income between ₹1 crore and ₹10 crores: Reduced from 33.38% to 25.17%, giving them an 8.22% saving.
- Income above ₹10 crores: Fell sharply from 34.94% to 25.17%, nearly a 10% drop.
This scale of reduction was unprecedented. Multinationals and large Indian corporates suddenly found themselves paying far less tax than before, giving them space to reinvest profits, fund acquisitions, or strengthen balance sheets. In many ways, this brought India’s corporate tax rates closer to those of Southeast Asian peers, which was one of the government’s explicit goals.
Notes
Beyond the headline rate cuts, the ordinance introduced detailed rules that companies had to carefully navigate.
1) Surcharge rate under Section 115BAA
For companies opting into Section 115BAA, the surcharge was fixed at 10%, regardless of the level of income. This uniform treatment was a relief compared to the earlier progressive surcharge slabs, which created uncertainty at higher income levels.
2) New manufacturing companies under Section 115BAB
Perhaps the most striking incentive was offered to new manufacturers:
- Any company incorporated on or after 1 October 2019 and engaged in manufacturing could avail a 15% base tax rate.
- After adding surcharge (10%) and cess (4%), the effective rate came to 17.16%.
- This was subject to conditions designed to ensure genuine manufacturing activity rather than tax structuring.
For India, this was a strategic move. Manufacturing had long lagged behind services in terms of contribution to GDP. By offering one of the lowest corporate tax rates in Asia, the government aimed to encourage both domestic entrepreneurs and foreign investors to set up plants in India.
3) Minimum Alternate Tax (MAT)
The MAT regime had often been a sore point for corporates, as it reduced the benefit of exemptions. With this ordinance:
- Companies opting into 115BAA or 115BAB were exempted from MAT entirely.
- For those continuing in the old system, MAT was reduced from 18.5% to 15%.
This reform made the concessional route even more attractive, while still offering relief to companies that chose to stay in the traditional framework.
4) Deductions and incentives disallowed under Section 115BAA
The concessional 25.17% tax rate under Section 115BAA came at a cost: companies had to give up several popular deductions, such as:
- Section 10AA: Profit-linked deduction for SEZ units.
- Additional depreciation under Section 32(1)(iia).
- Investment-linked deductions in backward areas under Section 32AD.
- Sectoral allowances, such as the tea, coffee, or rubber development allowance (Section 33AB) and site restoration fund (Section 33ABA).
- Research-related deductions, including various provisions under Section 35.
- Incentives for specified businesses under Section 35AD.
- Expenditure on agricultural and skill projects under Sections 35CCC and 35CCD.
- Most Chapter VIA deductions, except Section 80JJAA.
In other words, the government gave corporates a choice: a simpler, lower tax rate, or the traditional regime with a host of complex deductions. Many large companies preferred the certainty of the lower rate, even if it meant giving up incentives.
5) Impact on carried-forward losses
A critical issue was how past losses were treated. If earlier losses were tied to deductions that became ineligible under Section 115BAA, those losses could not be carried forward or set off against future income. They were deemed to have already been given effect.
This meant companies had to carefully calculate whether switching regimes would wipe out valuable tax shields. It was not a decision to be taken lightly, especially for businesses with significant accumulated losses.
6) Irrevocability of the option
Once a company opted for Section 115BAA, the choice was permanent. There was no option to return to the old system later. This irrevocability meant CFOs and boards had to think strategically, often running detailed projections before exercising the option. A short-term saving might prove costly in the long run if the company lost out on future deductions.
Conclusion
The 20 September 2019 ordinance marked a turning point in India’s approach to corporate taxation. For decades, businesses had been asking for a lower and more predictable tax regime. By introducing Sections 115BAA and 115BAB, the government provided precisely that: simplicity, competitiveness, and global alignment.
The immediate winners were large corporates, who saw their tax bills fall sharply. Mid-sized businesses also benefitted, though the savings were smaller in percentage terms. New manufacturing companies were handed an exceptionally attractive rate, underscoring the government’s push to build India as a global production hub.
At the same time, the reform was not without trade-offs. The removal of deductions, the treatment of carried-forward losses, and the irrevocability of opting into the new regime forced companies to make strategic, long-term decisions. Tax planning became less about hunting for deductions and more about weighing structural options.
For India’s economy, this ordinance was more than a financial adjustment—it was a signal. A signal to investors that India was serious about reform, a signal to businesses that the government wanted them to grow, and a signal to global markets that India was ready to compete with the best.
