LOWER-INCOME TAX FOR DOMESTIC COMPANIES UNDER SECTION 115BAA
The government of India has introduced the Taxation (Amendment) Ordinance 2019 on the 20th of September 2019 where Several amendments are made to the Income Tax Act,1961. Most important changes such as corporate tax rate cut for domestic companies and as well as for manufacturing companies was announced. MAT rate has also been reduced from the current 18.5% to 15%.
This new section for lower taxation will definitely provide benefits for newly registered companies and existing companies to pay lower taxes and use the money to grow their business.
The top ca firm in Mumbai is discussing the latest provision as below heading.
1. SECTION INSERTED UNDER WHICH GOVERNMENT REDUCED TAX FOR DOMESTIC COMPANIES
New section 115BAA has been inserted in the Income Tax Act,1961 where the domestic company has the option to pay tax @ 22% subject to fulfill certain conditions mentioned in the section and the same is applicable from the FY 2019-20 (AY 2020-21) onwards.
2. ELIGIBILITY CRITERIA OF SECTION 115BAA TO AVAIL LOWER TAX RATE UNDER SECTION 115BAA.
All domestic companies shall have an option u/s 15BAA to pay corporate income tax @ 22% (plus applicable surcharge and cess), subject to the following conditions as below.
3. 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 calculation of the effective tax rate is as below.
Base Tax Rate – 22%
Surcharge Applicable – 2.20%
@10% on Base rate
Cess @ 4% on total tax – 0.968%
Total Tax – 25.168%
Most importantly such companies will not be required to pay minimum alternate tax (MAT) under section 115JB of the act.
Domestic companies who opting for section 115BAA will not be able to claim MAT credits for taxes paid under MAT during the tax holiday period so companies would not be able to reduce their tax liabilities under section 115BAA by claiming MAT credits that they have paid earlier years. CBDT can issue a clarification on MAT credits in case of companies opting for tax under section 115BAA.
Further, 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.
We should keep in mind that 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 utilizing the MAT credit against the regular tax payable if any.
4. OPTION FOR THE COMPANY TO OPT OUT THE SECTION 115BAA
Option u/s 115BAA for lower taxation if company OPT cannot be withdrawn subsequently so it is advisable for domestic companies to before avail lower tax rate mentioned in the section, such companies should avail all their tax holiday period or exemptions/incentives as mentioned above because no time has been defined in the section to OPT the option so in nay financial year companies can avail this option.