Section 115BAA - New Tax Rate for Domestic Companies

Taxes play a significant role in the overall growth and development of the companies. Amongst the set of new tax rules introduced by the Government every year, the introduction of Section 115BAA on September 20, 2019 brought in a reduced tax rate for businesses operating in India. Section 115BAA offered a reduced tax rate of 22% with a surcharge and education cess of 10% and 4% along with a couple of exemptions for qualifying entities. Also, the MAT rate has been reduced from the current 18.5% to 15%.

Beyond figures, Section 115BAA was more about fostering a business-friendly environment, promoting investments and driving economic expansion.

Let’s discuss the corporate tax rate cut for domestic companies in detail focusing on the following:

What is the meaning of Section 115BAA of the Income Tax Act, 1961?

Section 115BAA was introduced by the Government of India through the Taxation (Amendment) Ordinance 2019 on September 20, 2019. Section 115BAA has been inserted in the Income Tax Act,1961 to give the benefit of a reduced corporate tax rate for the domestic companies. The section states that domestic companies have the option to pay tax at the rate of 22% plus surcharge of 10% and cess of 4%. The Effective Tax rate being 25.17% from the FY 2019-20 (AY 2020-21) onwards if such domestic companies adhere to certain conditions specified. 
Previously, all domestic companies operating in India had to pay tax at the flat rate of 30%. Also, the MAT rate has been reduced from the current 18.5% to 15%.

What are the key features of the Section 115BAA?

Here's a list of key features of the Section 115BAA:

• Lower Tax Rate: With this section, companies now have an option to pay tax at a reduced rate of 22% along with surcharge and cess of 10% and 4% leading to an effective rate of 25.17% which is lower than the previous 30%.
• No Minimum Alternate Tax (MAT): Companies opting to pay tax under section 115BAA are not required to pay MAT.
• Lower MAT Rate: This section has also reduced the MAT rate from 18.5% to 15%.
• Flexibility: Companies have the liberty to opt for either the concessional rate of tax or previous tax structure at any time.

What are the Conditions specified under eligibility criteria of section 115BAA

All domestic companies shall have an option to pay income tax at the rate of 22% (plus applicable surcharge and cess), provided the following conditions are complied with:

Such companies should not avail any exemptions/incentives under different provisions of income tax. Therefore, the total income of such company shall be computed without:

1. Claiming any deduction especially available for units established in special economic zones under section 10AA
2. Claiming additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal
3. Claiming deduction under section 33AB for tea, coffee and rubber manufacturing companies
4. Claiming deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
5. Claiming a deduction under Section 35 for expenditure on scientific research, or an amount paid to a university or research association or National Laboratory or IIT.
6. Claiming a deduction for the capital expenditure incurred by any specified business under section 35AD
7. Claiming a deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
8. Claiming deduction under chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA and 80M.
9. Claiming deduction under chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
10. Claiming a set-off of any loss carried forward or depreciation from earlier years, if such losses were incurred in respect of the aforementioned deductions
11. A claim by an amalgamated company for set-off of carried forward loss or unabsorbed depreciation belonging to an amalgamating company if such loss or unabsorbed depreciation is on account of the above deductions; claiming a deduction for additional/accelerated depreciation. The normal depreciation can however be claimed.
12. The above losses shall be deemed to have been allowed and shall not be eligible for carry forward and set off in subsequent years this means that if the company opts for 115BAA then the opportunity for claiming set off is lost forever;
13. Such companies will have to exercise this option to be taxed under the section 115BAA on or before the due date of filing income tax returns i.e usually 30th September of the assessment year. Once the company opts for section 115BAA in a particular financial year, it cannot be withdrawn subsequently. 
    The option should be in Form 10-IC, as notified by the CBDT. The form should be submitted online under a digital signature or under an electronic verification code.
14. There is no restriction on turnover and the company need not be a new company, any existing company can migrate into this section at any point.

What are the different tax rates for domestic companies?

Here's a table defining different tax rates for domestic companies:

What are the Effective Tax Rates with and without Section 115BAA?

Here’s a table showcasing a comparison of tax rates with and without section 115BAA

What is the new effective rate applicable to domestic companies?

The new effective tax rate, which will apply to domestic companies availing the benefit of section 115BAA is 25.168%. The break up such tax rate is as follows:

Such companies will not be required to pay Minimum Alternate Tax (MAT) under section 115JB of the act.

What is the appropriate time to choose Section 115BAA?

While section 115BAA brings the benefit of a lower tax rate, it is important to understand the key points to ensure that it is the right move for the company’s overall financial situation:

• Deadline for Return Filing
  In order to benefit from the 25% concessional tax rate, companies should make the decision before the due date for filing the income tax return, which is typically September 30 of the relevant assessment year.
• Financial Strategy and Irrevocability
  Opting for Section 115BAA offers an option to pay tax at the concessional rate but the decision is irreversible. It is important to understand that the decision taken is in line with the goals of the company.
• Losses and Depreciation
  It is important to consider that the set off of losses and unabsorbed depreciation attributable to certain deductions is not permissible under section 115BAA. So, it is better to weigh the benefit of a concessional tax rate against the potential tax savings from utilising losses and depreciation under the old system.
• Analyzing Current and Future Income Projections
  If a company expects stability or an increase in profits in future, then a lower tax rate would be beneficial. Counterproductive to this, if the company anticipates that certain deductions can reduce the overall tax outgo in future, then sticking to the current tax regime would be beneficial. 

Can taxpayer utilise MAT credits section 115BAA option is exercised

The domestic companies opting for section 115BAA will not be able to claim MAT credits for taxes paid under MAT during the tax holiday period. The companies would not be able to reduce their tax liabilities under section 115BAA by claiming MAT credits. The CBDT may issue a clarification on MAT credits in case of companies opting for tax under section 115BAA. Adjustment of the brought forward losses and unabsorbed depreciation for the purpose of Section 115BAA
The domestic company opting for section 115BAA shall not be allowed to claim set-off of any brought forward depreciation (additional depreciation) for the assessment year in which the option has been exercised and future assessment years.

Can a company opt out of this section?

Domestic companies that do not wish to avail themselves of this concessional rate immediately can opt for it after the expiry of their tax holiday period or exemptions/incentives, as mentioned earlier.

However, once such a company opts for the concessional tax rate under section 115BAA of the Income Tax Act,1961, it cannot be subsequently withdrawn.