Section 115BAA was introduced by the Ministry of Finance Government of India through the Taxation (Amendment) Ordinance 2019 on the 20th of September 2019. Several tax amendments are made to the Income Tax Act,1961 through this ordinance. Major Changes are done such as a corporate tax rate reduced for domestic companies. 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 under the following heading.
Brief About New section 115BAA
The new section – Section 115BAA has been inserted in the Income Tax Act, of 1961 to give the benefit for domestic companies to give the option to opt a reduced corporate tax rate. Section 115BAA states that domestic companies have the option to pay tax at a rate of 22% plus a surcharge of 10% and cess of 4%. So the Effective Tax rate will be 25.17%. This section will be applicable from the FY 2019-20 (AY 2020-21) onwards subject to some conditions need to be fulfilled by such domestic companies. The company need not pay tax under MAT if it opts for Section 115BAA.
Eligibility Criteria Of Section 115BAA To Avail Reduced Corporate Tax For Domestic Companies
All domestic companies Who want to opt for reduced corporate Income tax rates @ 22% need to fulfill the below condition are complied with.
i) Such companies should not avail of any exemptions/incentives under different provisions of income tax. Therefore, the total income of such a company shall be computed without claiming any deduction especially available for units established in special economic zones under section 10AA.
ii) 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
iii) Claiming deduction under section 33AB for tea, coffee, and rubber manufacturing companies.
iv) 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.
v) 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.
vi) Claiming a deduction for the capital expenditure incurred by any specified business under section 35AD.
vii) Claiming a deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on a skill development project under section 35CCD
viii) Claiming deduction under chapter VI-A with respect to certain incomes, which are allowed under sections 80IA, 80IAB, 80IAC, 80IB, and so on, except deduction under sections 80JJAA and 80M.
ix) 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.
x) 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 carrying 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 Domestic 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 or extended due dates in the relevant assessment year.
Once the company opts for section 115BAA in a particular financial year, it cannot be withdrawn subsequently.
The option should be filed 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 such restriction on turnover and the company need not be a new company so any existing company can migrate into this section at any point.
Calculation of New Effective Rate of Tax
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 22%
Surcharges 10% on base Rate 2.20%
Cess 4% on Base rate Plus Surcharge 0.968
Such companies will not be required to pay Minimum Alternate Tax MAT under section 115JB of the act.
Option to Carry Forward of MAT Credit / Losses / Unabsorbed Depreciation
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 of the benefit of section 115BAA after claiming the brought forward loss on account of additional depreciation and also utilizing the MAT credit against the regular tax payable if any.
Discuss the Availability of Opt-out The Option
The domestic companies who do not wish to avail of this concessional rate immediately can opt for the same 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.
The step taken to reduce corporate Income tax rate is very beneficial for Indian companies and object to introducing this section to promote new business, to promote the make in India campaign, and accelerate the growth of all corporates as no turnover criteria put to avail the benefit of section 115BAA. The new corporate income tax rate is a very competitive rate compared to the rest of the world and certainly attracts Indian and foreign companies to start a business in India.
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