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:
Section introduced to give effect to the reduced tax rate for domestic companies
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.
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:
- Claiming any deduction especially available for units established in special economic zones under section 10AA
- 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
- Claiming deduction under section 33AB for tea, coffee and rubber manufacturing companies
- 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
- 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.
- Claiming a deduction for the capital expenditure incurred by any specified business under section 35AD
- Claiming a deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
- 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.
- 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
- 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
- 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.
- 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;
- 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. For the AY 2020-21, the due date stands extended to 15th February 2021. 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.
- 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 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:
|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.
Can a company opt out of this section?
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.
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