Latest Updates on Section 115BAA for Lower Corporate Tax Rates

Section 115BAA of the Income Tax Act was introduced on 20^th September 2019 via Taxation Laws (Amendment) Ordinance, 2019 and was further approved by Taxation Laws (Amendment) Act, 2019. Section 115BAA offers reduced corporate tax rate for the domestic companies provided specific conditions are satisfied.

The present article briefly explains section 115BAA and its features thereof; specific conditions to be satisfied for availing benefit u/s. 115BAA and effective tax rates for domestic company with or without availing benefit u/s. 115BAA.

Section 115BAA of the Income Tax Act and its features –

Prior to introduction of section 115BAA, all the domestic companies were liable to pay income tax @ 30%. Section 115BAA of the Income Tax Act was introduced to provide concessional rate tax benefit to domestic companies of India. Salient features of section 115BAA are highlighted hereunder –

• Effective date of section 115BAA –

Effective date is any previous year starting on or after 1^st April 2019 i.e. from Previous Year 2019-2020 (Assessment Year 2020-2021).

• Effective tax rate under section 115BAA –

Effective tax rate for domestic company opting u/s. 115BAA is 22% tax rate + 10% surcharge + 4% education cess. Hence, effective tax rate is 25.17%.

• Exercising option for availing concessional rate benefit under section 115BAA –

Option for availing benefit u/s. 115BAA should be exercised by the domestic company on or before the due date of furnishing of income tax return. For availing option, domestic company is required to file Form 10-IC via e-filing portal.

Once the domestic company opts for concessional rate tax benefit u/s. 115BAA for any previous year, it cannot withdraw the option in any subsequent year.

• Applicability of Minimum Alternate Tax (MAT) provisions –

Domestic company opting for benefit u/s. 115BAA will not be required to pay MAT under section 115JB of the Income Tax Act. Importantly, such company will also not be entitled for previous MAT credit balance.

Specific conditions to be satisfied for availing benefit under section 115BAA of Income Tax Act –

Domestic company opting for benefit under section 115BAA will have to satisfy the following conditions –

1. Total income of the domestic company should be computed –

• Without claiming any deduction under section 10AA of the Income Tax Act i.e. deduction available for units established in Special Economic Zone;
• Without claiming additional depreciation allowed under section 32(1)(iia);
• Without claiming investment allowance provided under section 32AD towards investment in new plant or machinery in notified backward areas in the State of Bihar, Telangana, Andhra Pradesh or West Bengal;
• Without claiming deduction under section 33AB of the Income Tax Act available to tea or coffee or rubber manufacturing company;
• Without claiming deduction under section 33ABA towards deposits for site restoration fund;
• Without claiming following deduction under section 35 as listed hereunder –

i. Section 35(1)(ii) – deduction towards amount paid to research association or university or college or other institution to be used for scientific research;

ii. Section 35(1)(iia) – deduction towards amount paid to a company to be used for scientific research;

iii. Section 35(1)(iii) – deduction towards amount paid to research association to be used for statistical research or research in social science;

iv. Section 35(2AA) – deduction towards amount paid to University or National Laboratory or an Indian Institute of Technology or specified person to be used for approved scientific research;

v. Section 35(2AB) – deduction towards expenditure incurred by company engaged in bio-technology or in any business of production or manufacture of any article/ thing, wherein, such expenditure is incurred for in-house and development as approved by prescribed authority;

vi. Section 35AD – deduction in respect of capital expenditure on specified business;

vii. Section 35CCC – deduction towards expense incurred on an agricultural extension project; and

viii. Section 35CCD – deduction towards expense incurred on skill development project.

• Without claiming any deduction under any provisions of Chapter VI-A other than provisions of section 80JJAA or Section 80M of the Income Tax Act.

2. Without set-off of loss carried forward or depreciation from earlier Assessment Years provided such loss or depreciation is resultant to any of the deductions referred above;

3. Without set-off of loss or allowance for unabsorbed depreciation under section 72A provided such loss or depreciation is resultant to any of the deductions referred above.

Importantly, while computing total income, depreciation under section 32 of the Income Tax Act is to be claimed. But, additional depreciation on new plants or machinery acquired/ installed after 31^st March 2005 is not allowed.

Effective tax rate for domestic company with and without availing benefit under section 115BAA –

Following table provides analysis of effective tax rate as applicable to domestic company when benefit u/s. 115BAA is availed or when benefit u/s. 115BAA is not availed –

Importantly, as stated above, once option under section 115BAA is opted the same is irreversible. Hence, before availing the same, it is advisable for the company to carry out detail working since various deductions and set off are not available u/s. 115BAA.