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The section 115BAA was introduced by the Government of India through the Taxation (Amendment) Ordinance 2019 on the 20th of September 2019. Several amendments are made to the Income Tax Act,1961 through this ordinance. Changes such as a corporate tax rate cut for domestic companies and as well as for manufacturing companies was announced. Also, the MAT rate has been reduced from the current 18.5% to 15%.
Let’s discuss the corporate tax rate cut for domestic companies in detail:
The new section – 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. Section 115BAA states that domestic companies have the option to pay tax at a rate of 22% plus sc 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. The company need not pay tax under MAT if it opts for 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:
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:
|Base tax rate||Surcharge applicable||Cess||Effective tax rate|
|22%||10%||4%||22*1.1*1.04 = 25.168%|
Such companies will not be required to pay Minimum Alternate Tax (MAT) (MAT) under section 115JB of the act.
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.
There is no timeline for the domestic companies to choose a lower tax rate under section 115BAA. So such companies can avail the benefit of section 115BAA after claiming the brought forward loss on account of additional depreciation and also utilising the MAT credit against the regular tax payable if any.
The domestic companies who do not wish to avail this concessional rate immediately can opt for the same after the expiry of their tax holiday period or exemptions/incentives as mentioned in point 2 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.