Eligibility of deductions under Chapter VI-A while opting for Concessional Tax Regime
Background
The Taxation Laws (Amendment) Act 2019 (‘TLAA’) introduced new section 115BAA for Concessional Tax Regime (‘CTR’), which provides for reduced tax rates with effect from FY 2019-20. Tax rates under the CTR for the existing domestic Companies is @ 22% plus surcharge @ 10% and 4% cess. Accordingly, as per the normal provisions of the Income Tax Act, 1961 (‘the Act’) the effective tax rate for domestic companies opting to pay tax under section 115BAA of the Act shall be 25.17%. Further, the domestic companies opting for CTR under section 115BAA of the Act shall not be required to pay Minimum Alternative Tax (‘MAT’).
Any domestic company while opting CTR needs to follow certain conditions which are given as under:-
- The company would not be allowed to claim the prescribed deductions* / incentives.
- Brought forward losses attributable to the prescribed deductions/incentives claimed in earlier years would lapse.
- No set-off of MAT credit shall be available.
- Depreciation would be allowed as per the manner prescribed.
- Companies currently availing the prescribed incentives/deductions will have an option to move into CTR at any point in time. Option to avail concessional tax rate to be exercised on or before the due date for filing the income tax return. The option once exercised cannot be subsequently withdrawn.
* One of the prescribed deductions is deduction under Chapter VI-A.
Eligibility of deductions under Chapter VI-A while opting for CTR
As per the provisions of section 115BAA (as inserted by TLAA), while computing the total income of a domestic company opting for CTR, specified incentives (such as specified provisions in relation to units established in Special Economic Zones under Section 10AA of the Act) cannot be availed. Apart from the specified incentives, a company cannot claim deduction under Chapter VI-A falling under the heading ‘C-Deduction in respect of certain incomes’, other than the provisions of section 80JJA of the Act. Thus, deduction under Chapter VI-A falling under the heading C except for the provisions of section 80JJA of the Act cannot be taken by the company while opting CTR. The deductions falling under the heading C which cannot be claimed are in the range of the section 80HH to section 80RRB (except deduction under section 80JJA).
This implies that the Company opting for CTR can claim other deductions under Chapter VI-A falling under the heading other than C (e.g. section 80G, 80GGB etc).
Amendments proposed by the Finance Bill, 2020
The Finance Bill, 2020 (‘the Bill’) as introduced in the Lok Sabha on 1 February 2020 proposed certain amendments in section 115BAA of the Act. The Bill proposed to amend the provisions of section 115BAA of the Act, by not allowing deduction under any provisions of Chapter VI-A other than section 80JJA or section 80M. Further, it was proposed that the said amendments shall take retrospective effect from AY 2020-21.
By virtue of the proposed amendment, any domestic company opting for CTR from FY 2019-20 shall not be able to claim any deduction under the Chapter VI-A except deduction as per section 80JJA and section 80M.
Enactment of Finance Act, 2020
The Finance Bill, 2020 received Hon’ble President’s Assent on 27 March 2020 and with this Finance Act, 2020 was enacted. The Finance Act, 2020 was enacted with some changes in the proposals of section 115BAA of the Act as laid down in the Bill which are as under:-
According to the Finance Act, 2020, any domestic company opting for CTR under section 115BAA of the Act cannot claim deduction under any provisions of Chapter VI-A other than section 80JJA or section 80M effective from AY 2021-22. Thus, the Government while enacting the Finance Act, 2020 has deferred the condition of not claiming any deduction falling under Chapter VI-A other than section 80JJA or section 80M to next financial year i.e. FY 2020-21.
In view of the said amendments in the Finance Act, 2020, any domestic Company opting for CTR from FY 2019-20 shall not be able to claim deductions under Chapter VI-A falling only under the heading ‘C’ other than the provisions of section 80JJA of the Act but will be eligible to claim deductions under Chapter VI-A falling under other heading.
Eligibility of deduction while making donation to PM CARES Fund
The Government of India has set up the ‘Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund’ (‘PM CARES Fund’) with the primary objective of dealing with any kind of emergency or distress situation such as that posed by COVID-19. As per ‘Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020’ (‘the Ordinance’) dt. 31 March 2020, the donation made to PM CARES Fund shall be eligible for 100% deduction u/s 80G of the Act. Further, limit on deduction of 10% of gross income shall also not be applicable for donation made to PM CARES Fund.
As mentioned above, any domestic Company opting for CTR in FY 2019-20 cannot claim deduction under Chapter VI-A falling under the heading ‘C’, other than the provisions of section 80JJA of the Act. However, it can still claim deduction of donation made to PM CARES Fund as donation to PM CARES Fund falls under the section 80G of the Act which ultimately falls under the heading ‘B – Deductions in respect of certain payments’.
Further, as per the Ordinance, any donation prescribed under section 80G of the Act made upto 30 June 2020 shall be eligible for deduction under section 80G of the Act for FY 2019-20. As such, the donations made to PM CARES Fund upto 30 June 2020 shall be eligible for deduction under section 80G for FY 2019-20 and the companies shall also not lose its eligibility to pay tax as per CTR for income earned in FY 2020-21.
Conclusion
For FY 2019-20, any domestic Company opting for CTR cannot take deduction under Chapter VI-A falling under the heading ‘C’, other than the provisions of section 80JJA of the Act. However, it can still take other deductions falling under Chapter VI-A under the heading other than the heading ‘C’.
From FY 2020-21, any domestic company opting for CTR cannot claim deduction under any provisions of Chapter VI-A other than section 80JJA or section 80M of the Act. Thus, from FY 2020-21, if CTR is opted, the only 2 deductions available under Chapter VI-A to the domestic company are deduction as per section 80JJA and section 80M of the Act respectively.
Disclaimer
The information contained in this write up is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations.
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