Whether Company should continue with the Old tax regime or to pay tax under new tax regime?

Since the financial year 2019-20 has already gone and currently in this lockdown situation due to Covid-19 pandemic, most of the companies are having their working from home, so I think it’s the right time to decide for the companies that whether they want to avail New taxation regime or they will continue to pay tax under the Old taxation regime (may be they have a thought that “Old is Gold”) from Assessment year 2020-2021 onwards.

Before taking any decision between the two, I firmly advise to all the corporates to please take care of the below mentioned observations: 

As you all are aware, currently the domestic companies are paying taxes at the rate of 25%, if its turnover or gross receipts does not exceed Rs. 400 crore during the financial year 2017-18 or it opts for Section 115BA. In all other cases, a domestic company is chargeable to tax at the rate of 30% plus applicable surcharge & cess.

Our Honorable Finance Minister, Smt. Nirmala Sitharaman ji, vide the Taxation Laws (Amendment) Ordinance, 2019 introduced two new taxation regime for domestic companies – Section 115BAA & Section 115BAB.

As per Section 115BAA, domestic companies will have an option to pay tax at a reduced rate of 22% plus applicable surcharge and cess. However this benefit shall be available only when total income of a company has been computed without claiming specified deductions, incentives, exemptions and additional depreciation under the Income-tax Act.

New Section 115BAB provides for a reduced rate of 15% for the domestic companies but this regime shall be available only for the new manufacturing companies that are incorporated in India on or after 1st October, 2019 but on or before 31st March, 2023. Hence old companies will not able to take the benefit of this section. Since this benefit is available only for the new incorporated companies, hence we will not talk further about this section.

As per August Bulletin of MCA, as on 31-08-2019, about 11.86 lakh companies are active in India. From the above companies around 99.3% of the companies are having turnover of less than Rs 400 crore. Thus, it can be judiciously concluded that most of the domestic companies are paying tax at the rate of 25% (plus surcharge and cess) under Section 115BA or under First Schedule of the Finance Act.

Though the new tax regime of Section 115BAA reduces the tax rates, but at the same time the company has to give up so many exemptions, incentives & deductions which they are right now availing. The tax rate prescribed under section 115BAA is 22% which shall be further increased by a surcharge of 10% and health and education cess of 4%. Hence, the effective tax rate under Section 115BAA shall be 25.168%.

If a domestic company has a turnover of less than Rs. 400 crores and it does not opt for section 115BAA then it shall be chargeable to tax at the rate of 25% plus applicable surcharge and health & education cess. The surcharge in such a case shall be 7% or 12% when the total income of the company exceeds Rs. 1 crores or Rs. 10 crores, respectively.

A comparative table enumerates the effective tax rate when a company opts for section 115BAA and it does not opt for the same.

Table A- Effective Tax Rate (inclusive of surcharge and cess) where company opts for Section 115BAA or not

Total Income Effective Tax Rate (inclusive of surcharge & cess)
  Co. opts for section 115BAA Co. doesn’t opt for section 115BAA
Upto Rs. 1 Crore 25.17% 26%
More than Rs. 1 Crore but upto Rs. 10 Crore 25.17% 27.82%
More than Rs. 10 Crore 25.17% 29.12%

Though the tax rates in case of a company opting for section 115BAA is slightly lower but such companies will not be able to claim various tax benefits available under the Income-tax Act. Such tax benefits are given in Table B below:

Table B- Exemptions, Incentives or Deductions not available to companies opting for section 115BA, 115BAA

Section 10AA Deductions for units established in SEZ.
Section 32(1)(iia) Additional Depreciation in respect of new plant & machinery
Section 32AD Deduction for investment in new plant & machinery in notified backward areas.
Section 33AB Deduction in respect of tea, coffee or rubber business.
Section 33ABA Deduction in respect of business consisting of extraction of petroleum or natural gas in India.
Section 35(1)(ii) Deduction for donation made to approved scientific research association, university colleges etc.
Section 35(1)(iia) Deduction for payment to Indian company for doing scientific research
Section 35(1)(iii) Deduction for donation made to university, college for doing research in social science.
Section 35(2AA) Deduction for donation made to National Laboratory or IITs.
Section 35(2AB) Deduction for capital expenditure on scientific research related to manufacturing of ant article or thing
Section 35AD Deduction for investment made in Specified businesses.
Section 35CCC Deduction in respect of expenditure on notified Agriculture Extension Project.
Section 35CCD Deduction in respect of expenditure on notified Skill Development Project.
80G Deduction in respect of donations made to charitable/religious trust.
80GGB Deduction in respect of contribution made to political parties or electoral trusts by an Indian company.
Deductions Under Chapter VI-A under Heading C i.e. 80-IA to 80IE except 80JJAA

Moreover the company cannot carry forward its losses & unabsorbed depreciation from earlier assessment years if such loss or depreciation is attributable to any of the deductions referred above.

The effective tax rates in Table A above are not strictly comparable on a like-to-like basis. If company opts for section 115BAA, the effective tax rate is subject to giving up deductions and exemptions given in Table B above.

Let us take an illustration to understand the impact of new change and how the decision should be taken as to switching to new tax regime.

ABC Ltd, a manufacturing company incorporated in year 2000-01, purchased a new plant and machinery of Rs. 10 lakhs on 01-04-2019. Its turnover for the previous year 2017-18 was less than Rs. 400 crore and, therefore, it would be chargeable to tax at the rate of 25% for the Assessment Year 2020-21. The total income of the company for Assessment Year 2020-21 before allowing for additional depreciation in respect of new plant and machinery is Rs. 20 lakh.

For the Assessment Year 2020-21, the company shall have only 2 options – opt for section 115BAA or pay tax as usual at the rate of 25%.

The total income of the company and tax thereon in both the cases shall be computed as follows:

Particulars If co. opts for Section 115BAA If co. doesn’t opt for Section 115BAA
Total Income before allowing additional depreciation 20,00,000 20,00,000
Less: Additional depreciation available as per section 32(1)(iia) NA 2,00,0000

(10,00,000 *20%)

Total Income (A) 20,00,000 18,00,000
Applicable Tax rate (b) 22% 25%
Tax on Total Income (c=a*b) 4,40,000 4,50,000
Add: Surcharge (d) 44,000 Nil
Tax After Surcharge (e= c+d) 4,84,000 4,50,000
Add: HEC @ 4% (f=e*4%) 19,360 18,000
Total Tax Liability (g=e+f) 5,03,360 4,68,000
Extra tax payable under Section 115BAA Rs. 35,360

Therefore we can see from the above example, if Co. opts for Section 115BAA, then it ended up in paying extra tax amounting to Rs. 35,360.

This is just a one scenario; they can be numerous instances where the company is availing various incentives & exemptions while computing its total income. Therefore, it is highly recommendable to all the corporates to make the comparison like this which I just did in the above illustration & then see under which option the tax is coming less & then take its decision accordingly.

Another significant factor which needs to be taken care-off while taking the decision is MAT Credit. As per amended section 115JB, if a company opts to pay tax under section 115BAA, then it will not be required to pay “Minimum Alternate Tax (MAT) i.e. the company will be exempted from paying MAT.

Now just think over of those companies which have accumulated so much of MAT Credit over the years. Now, if they choose to pay tax under the new regime, then they will end up in losing all their MAT Credit. Therefore, the above factor would also need to be considered before taking the decision.

Secondly in the start-up companies, in the initial years there would be high value of unabsorbed depreciation because the taxable profits are not sufficient to absorb depreciation. Now, if the company chooses the new regime, then this unabsorbed depreciation would also need to be sacrificed by the companies.

Lastly, due to this Covid-19 the Govt. of India has introduced one new fund named “PM-CARES” fund, under which if any person contributes any amount, then it will get 100% deduction without any limit u/s 80G.

Therefore the listed companies & other big unlisted public & private companies which have their responsibility towards the society also would like to contribute the amount not only to fulfill their requirements under the Companies Act, 2013 but also to build their image in the society.

Now, if the company chooses the new taxation regime, then it will again not been able to claim deduction u/s 80G.

Conclusion

At last, I would just like to say it will not be correct to jump to a conclusion based on the effective tax rates that it will be beneficial for a domestic company with turnover not exceeding Rs. 400 crore to opt for section 115BAA blindly. The feasibility and desirability of continuing in present regime and availing all incentives and benefits given in Table B above and utilizing MAT credit and then only migrating to section 115BAA regime needs to be explored based on detailed calculations in facts and circumstances of each case of every company.

In case of further clarifications, please reach out to me on mittelnischal54@gmail.com or 8851393817.

Author Bio

Qualification: CA in Practice
Company: VMSS & Associates
Location: NewDelhi, New Delhi, IN
Member Since: 21 Apr 2020 | Total Posts: 1

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One Comment

  1. SURESH GOENKA says:

    If option under section 115BAA is exercised, why in your illustration, surcharge has been shown as payable even if total income is less than Rs. 1 crore. Pl. draw attention to the specific clause of the Act which requires this. Thank you.

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