Intricacies of Section 115BAA- New tax rate for domestic companies

Intricacies of section 115BAA

Introduction

With the introduction of new section 115BAA, domestic companies now have the option to pay tax at a lower rate of 22% (plus surcharge and education cess) with effect from AY 2020-21. The section basically allows corporate assessees to pay tax at a lower rate on foregoing majority of deductions/exemptions which otherwise are claimable. Option can be exercised in any assessment year before the due date of return, and once the option is exercised, the same cannot be withdrawn in any subsequent year.

Various informative articles are already available in the web space giving detail of the provisions of section 115BAA, hence we will not be repeating the basic provisions of the section here again. In this article we will try to emphasize only on certain lesser deliberated aspects of section 115BAA, which are essential in the decision making of opting for the said provision (more importantly timing of opting of the said section i.e. from which AY?).

1. Accelerated Depreciation on new plant and machinery based on indigenous technology:

Section 115BAA(2)(i) provides for non-allowance of various deductions, including depreciation under section 32(1)(iia) (i.e. additional depreciation @20% on new plant and machinery installed by manufacturing company). Further, section 115BAA (2) (iv) states that that depreciation under any provision of section 32 can be claimed, except for additional depreciation under section 32(1)(iia).

Hence, it is clear that any other depreciation under section 32 can be claimed except for additional depreciation. Rates and manner for claiming such depreciation are prescribed in Rule 5 read with Appendix I/IA of the Income Tax Rules, 1962. Further Rule 5(2) allows claim of accelerated rate of depreciation @ 40% (instead of normal rate of 15%) on new plant and machinery that are developed based on indigenous technology, subject to prescribed conditions.

As section 115BAA do not restrict claim of any other depreciation other than additional depreciation u/s 32(1)(iia), it can be safely said that accelerated depreciation as per rule 5(2) are allowable for companies opting for lower rate of tax.

2. Set off of bought forward unabsorbed depreciation/losses:

Clause (ii) and clause (iii) of sub section (2) of section 115BAA, provides for non-allowance of set off of unabsorbed depreciation or losses from earlier assessment years, if such depreciation/losses are attributable to deduction mentioned in clause (i).

A clarification has also been issued by the CBDT vide circular dated 02^nd October, 2019 on the allowability of bought forward loss on account of additional depreciation. The circular confirms that such set off is not allowable and states that the companies may exercise the option after setting off such losses, as there is no time limit within which such option has to be exercised.

Hence, there is no ambiguity on non allowability of set off of such bought forward losses/depreciation. Now, we shift our focus on whether such unabsorbed loss/depreciation be allowed to be added back to the WDV of the assets. We will try to find out our answer in sub section (3) of section 115BAA.

Let us first read sub section (3) as reproduced below:

“The loss and depreciation referred to in clause (ii) and clause (iii) of sub-section (2) shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year:

Provided that where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2020, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020”.

Sub section (3) makes it ample clear that no further effect of such loss/depreciation can be given in WDV or otherwise; and hence no further deduction shall be allowed for such loss/depreciation in any subsequent year by way of depreciation or any other mechanism.

However, proviso to sub section (3) allows adjustment in opening WDV of AY 2020-21 of depreciation allowance (i.e. additional depreciation) which has not been given full effect to up-to AY 2019-20, if the option of lower rate of tax is exercised for the AY 2020-21. Hence, if any unabsorbed depreciation is not allowed to be set off after opting for section 115BAA, the said proviso allows the assessee to add the value to the WDV of the block in the prescribed manner. However, no such manner has been prescribed for such adjustment. Further, the adjustment is specifically for the assessee who opt for lower rate for the AY 2020-21 only; i.e. assessee opting in subsequent year/s, will not be allowed to adjust the unabsorbed depreciation, if any.

3. Interplay between additional depreciation/deductions and MAT:

In point 1, we have already discussed that additional depreciation is not claimable for assessee opting for lower tax rate. In contrast, such companies are exempted from payment of Minimum Alternate Tax (MAT) as provided in sub section (5A) of section 115JB.

Both claim of additional depreciation and MAT liability are actually reordering of cash flows over the years (i.e. timing difference), without actually impacting the total cumulative cash flow. Where additional depreciation allows assessee to defer the tax outgo by claiming higher depreciation in initial year/s, MAT provision makes the assessee to pay the tax beforehand which otherwise would not have been payable or payable at lower amount as per normal provision of the Act.

For example, companies having higher additional depreciation may have lower tax liability as per normal provision of the Act, than the tax liability as per section 155BAA. However, MAT tax liability u/s 115JB may still be higher, and hence the cash outgo will be higher, than the tax liability as per section 115BAA. This may happen in case of companies having high value plants/projects operationalised during the year. However, this may not be true in many other situations.

The point we want to emphasize is that companies should evaluate its estimated future cash flows in both the scenarios (i.e. (i) if option of section 115BAA is exercised and (ii) if option not exercised) and compare the PV (present value) of such cash flows. This evaluation will aid the corporate assessees in taking the decision in more rational manner and will further help them on timing of exercising the option (i.e. whether to exercise the option in the same AY or in any of the subsequent AY).

4. Deduction under Chapter VI-A:

Amended section 115BAA provides for non-allowance of deduction under Chapter VI-A, except for deduction under section 80JJAA.

Prior to the amendment that has been made effective from AY 2021-22, the provision stipulated non-allowance of deduction under heading “C” of Chapter VI-A, other than section 80JJAA. Hence, deduction under other headings of Chapter VI-A (for example deduction u/s 80G, 80GGA, 80GGB, etc falling under heading “B”) are available to the assessee for the AY 2020-21.

Disclaimer: This article is solely for educational purpose and cannot be construed as legal opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.