Detailed Analysis of Sec 115BAA of the Income Tax Act

With the introduction of Section 115BAA of the Income Tax Act, 1961, domestic companies who are paying income tax at the rate of 25% or 30% now have an option to pay tax at a lower rate. Read on to know more.

The Government of India has introduced the Taxation Ordinance on the 20th of September 2019, which is effective from FY 2019-20, Assessment Year 2020-21. With this ordinance, several amendments are made to the Income Tax Act, 1961. Changes in corporate tax rate cut for domestic companies as well as for manufacturing companies was announced.

Any domestics company that had opted for Section 115BAA will pay income tax at the rate of 22% on its income, irrespective of its turnover during the previous financial year. This rate cut has brought a breathing space for many domestic companies resulting in lower cash outflow in terms of corporate tax.

Unlike Section 115BAB of the Income Tax Act, 1961, which is restricted to companies that are engaged in manufacturing activities, this section is applicable to all types of domestic companies.

According to Section 115BAA of the Income Tax Act, domestic companies have an option to pay income tax at the rate of 22% on their total profit, provided the conditions specified under this section are satisfied. The requirements to meet for availing the option under Section 115BAA are as follows:

A) Such domestic companies should not claim the following exemptions and deductions.

1. Exemptions related to units in SEZ (Special Economic Zone) under Section 10AA.
2. Additional depreciation under Section 32 and investment allowances under Section 32AD on account of new plant and machinery in some backward regions in the state of West Bengal, Telangana, Bihar, and Andhra Pradesh.
3. Claiming deduction under Section 33AB for tea, coffee and rubber manufacturing companies.
4. Deductions under Section 33ABA by making deposits towards site restoration by domestic companies engaged in petroleum or natural gas or both.
5. Deductions concerning expenditure incurred in scientific research under Section 35.
6. Deductions on capital expenditure on business specified under Section 35AD.
7. Deductions allowed for expenditure incurred on agriculture extension project under Section 35CCC or skill development project under Section 35CCD.
8. Chapter VI – A of the Income Tax Act, 1961, deductions including a deduction on income specified under Section 80IB, 80IAB, 80IA, etc. Except for deductions under Section 80JJAA concerning the recruitment of new employees.

Other deductions

B) Domestic companies should exercise this option to pay tax at the rate of 22% before the due date for filing the (ROI) Return of Income. Even if it has defaulted in filing return of income or filled the return after the specified due date under Section 139(1). However, the option to exercise should be given before the due date, as defined under Section 139 (As per Section 115BAA [4]).

C) Once the option is exercised, subsequent revocation of Section 115BAA is not possible.

The new effective tax rate, which will be applicable to domestic companies availing benefits of Section 115BAA is 25.168%.

The companies availing benefits under Section 115BAA will not be required to pay MAT (Minimum Alternate Tax) under Section 115JB of the Income Tax Act.

The domestic companies opting for Section 115BAA cannot claim MAT credits for tax paid against MAT during the tax holiday period. The companies would not be able to lower their tax liabilities under Section 115BAA by claiming MAT credits.

Moreover, any domestic company opting for Section 115BAA will not be allowed to claim a set-off of any brought forward depreciation for the assessment year in which the option has been availed along with future assessment years.

There is no time limit for domestic companies to choose a reduced tax rate under Section 115BAA. Therefore, companies can avail benefits mentioned under Section 115BAA after claiming the brought forward loss on account of additional depreciation. They can also utilise MAT credits against the regular tax payable, if any.

• There will be a surcharge of 10% included in the tax rate, irrespective of the income of domestic companies opting for Section 115BAA.
• The effective tax rate comes to 25.168% on the total income of the assessee.
• Once the option of Section 115BAA has been exercised, it has to be followed subsequently for all the assessment years.
• Domestic companies opting for Section 115BAA will be given marginal relief.
• Since Section 115BAA is only an optional way to pay tax, companies should plan a base strategy before deciding to opt for the same.

Domestic companies opting to pay tax under Section 115BAA cannot set off their loss incurred on account of Section 32(1) (iia) and MAT credits specified under Section 115JAA. Therefore, it is advisable for these companies first to exhaust the loss and credit available. Then, from the next financial year, an option under Section 115BAA can be exercised since there is no specified timeline for opting for this section.