LOWER INCOME TAX FOR DOMESTIC COMPANIES UNDER SECTION 115BAA

LOWER INCOME TAX FOR DOMESTIC COMPANIES UNDER SECTION 115BAA

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 also been reduced from the current 18.5% to 15%.

This new section for lower taxation will definitely provide benefit for newly registered companies and existing companies to pay lower tax and use money to grow their business..

We discuss the latest provision as below heading.

  1. New section inserted under which government reduced tax for domestic companies.
  2. Eligibility criteria of section 115BAA to avail lower tax rate.
  3. New effective rate applicable to domestic companies.
  4. Option for the company to opt out the section 115BAA.

1. SECTION INSERTED UNDER WHICH GOVERNMENT REDUCED TAX FOR DOMESTIC COMPANIES

New section 115BAA has been inserted in the Income Tax Act,1961 where domestic company have option to pay tax @ 22% subject to fulfil certain condition 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 following conditions as below.

  1. Such companies should not avail any exemptions/incentives under different provisions of income tax. so the total income of such company shall be computed without:
    • Claiming any deduction especially available for units established in SEZ 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 for expenditure made for scientific research under section 35.
    • 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.
    • Claiming a set-off of any loss carried forward from earlier years, if such losses were incurred in respect of the aforementioned deductions.
  2. Such domestic companies will have to exercise this option to be lower taxed under the section 115BAA on or before the due date of filing income tax returns i.e normally 30th September of the assessment year and once the company opts for section 115BAA in a particular financial year, it cannot be withdrawn subsequently.

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 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 which 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 utilising 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 section, such companies should avail all their tax holiday period or exemptions/incentives as mentioned above because no time has been defined ij the section to OPT the option so in nay financial year companies can avail this option.

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Swapnil S

CA in Mumbai

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