Reduced Corporate Tax Rate- Introduction of New Section 115BAA & 115BAB inserted by Taxation Laws (Amendment) Act, 2019

In order to attract fresh investment in manufacturing sector and thereby provide boost to ‘Make-in-India’ initiative, government of India on 20th September 2019, introduce Taxation Laws (Amendment) Ordinance 2019 wherein government reduced the corporate tax rates to 22% for existing domestic companies and 15% for new domestic manufacturing companies and other fiscal reliefs. After slashed rates for corporate taxation, India becomes the country where corporate tax rate is very Low as compared to other leading countries. If company opts for this scheme then it has to forego the various exemptions or deductions which are otherwise allowable to the company which not opt for this scheme. This step eases the complicated process of checking the eligibility of each and every exemptions/Deductions available to company and then meet their conditions, now company is not required to carry out such tedious task and only pay tax at reduced rate.

WHAT ARE SALIENT FEATURES OF NEW SECTION 115BAA

The salient features of new section 115BAA are as under:

♦   Section 115BAA has been inserted w.e.f. from FY 2019-20.

♦   New section 115BAA allows any domestic company (carrying out any activity) an option to pay income-tax at the rate of 22% subject to condition that they will not avail any exemption/incentives or reliefs mentioned in annexure-I.

♦   The effective tax rate for these companies shall be 25.17% inclusive of surcharge@ 10% irrespective of Income & cess @ 4%.

♦   Also, such companies shall not be required to pay Minimum Alternate Tax.

♦   Existing companies cannot carry forward and set off their unutilised MAT credit if they opt for section 115BAA.

♦   If company fails to satisfy the conditions contained in sub-section (2) in any previous year (i.e. claims incentives/reliefs not permissible to be claimed) the option shall become invalid in respect of that year and subsequent assessment years and other provisions of the Act shall apply, as if the option had not been exercised for the that year and subsequent assessment year.

♦   A company which does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of Minimum Alternate Tax has been reduced from existing 18.5% to 15%.

Opting in & Opting Out for Section 115BAA

♦   Form 10-IC is required to fill according to rule 21AE of the Income Tax Rules before the Due Date of filing the ITR as per Section 139(1) to take the benefit of section 115BAA.

♦   Such option once exercised shall apply to subsequent assessment years. However, company can permanently exit section 115BAA and can claim normal deductions/exemptions and pay tax as per normal regime.

WHAT ARE SALIENT FEATURES OF NEW SECTION 115BAB

The salient features of new section 115BAB are as under:

♦ Applicable from FY 2019-20 on new domestic companies incorporated on or after 1st October 2019 for manufacturing or production of any article or thing and start manufacturing up to 31st March, 2023. Subject to condition that they will not avail any exemption/incentives or reliefs mentioned in annexure-I

♦ Such New Company must not be formed by Splitting up or Reconstruction of earlier business in existence.

♦   Such company shall have an option to pay income-tax at the rate of 15%.

♦  The effective tax rate for these companies shall be 17.16% inclusive of surcharge @ 10% irrespective of the amount of total income & cess @ 4%.

♦  Such companies shall not be required to pay Minimum Alternate Tax.

♦  Rate of 17.16% will apply to income derived from or incidental to manufacturing or production for which no special rate provided in Chapter XII.

♦ Effective rate of tax shall be 25.17% for any income which has neither been derived from nor is incidental to manufacturing or production of an article or thing and in respect of which no specific rate of tax has been provided separately under Chapter XII. No deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income.

♦ For short term capital gains derived from transfer of a capital asset on which no depreciation is allowable under the Act, effective rate of tax shall be 25.17%.

♦  The benefit of this section shall not be available to the business of—

(i)  Development of computer software in any form or in any media;

(ii) Mining;

(iii)Conversion of marble blocks or similar items into slabs;

(iv)Bottling of gas into cylinder;

(v) Printing of books or production of cinematograph film;

(vi)Any other business notified by Central Government in this behalf.

Conditions Regarding Plant & Machinery & Building:

(i) Company has to use New Plant & Machinery (Use of Old Plant & Machinery is allowed up to 20% of the total value of Plant & Machinery). It is provided that the plant & machinery used by the company has not been used in India by any other person or No deduction in respect of Depreciation has been allowed in India on that plant and machinery to any other person.

(ii) However, Second Hand Plant & Machinery can be imported from outside India.

(iii) Cannot use the building which was earlier used as Hotel/Convention Center and deduction u/s 80ID has been claimed on that building

Opting In and Out for section 115BAB Regime

♦ The option for availing section 115BAB benefits is required to be exercised by the company by filing Form 10-ID as per Rule 21AF of Income Tax Rules on or before the due date specified under 139(1) i.e. up to due date of Filing ITR.

Note: Option has to be exercised by the company at the time of First Return, i.e. if it filed the First ITR without opt for 115BAB then at the later stage that company won’t be able to opt 115BAB, however it can opt Section 115BAA and pay tax @ 22%

♦ Company, after having opted for section 115BAB as above, may exit section 115BAB later in any succeeding year and opt for normal regime by claiming deductions/reliefs and pay @ 25% or 30% as the case may be. In that case, the exit from section 115BAB shall be permanent and company will never again be able to opt for section 115BAB.

♦ However, it can later permanently migrate to section 115BAA anytime if it finds that section more favourable than the normal regime. It can similarly later permanently exit section 115BAA for normal regime by claiming deductions/reliefs.

Summary Table for Comparison of Rates of Tax

Particulars Section 115BAA Section 115BAB Others
Applicable from

 

AY 2020-21 AY 2020-21
 

Type of company

 

All domestic companies

Domestic company engaged in manufacturing/

production

 

Any domestic company

 

 

Eligibility (start date)

 

 

No specific requirement

Set-up and registered on or after 1 October 2019 (manufacturing to commence by 31

March 2023)

 

 

 

Allowability of prescribed deduction/ loss  

No

 

No

 

Yes

Basic tax rate 22% 15% 25%/30%
Surcharge 10% 10% 7%/ 12%
Cess 4% 4% 4%
Applicability of MAT  

Not applicable

 

Not applicable

 

Yes [15%]

Applicability of Specified Domestic Transactions 92BA  

Not applicable

 

Applicable

 

Applicable

Annexure-I:

List of Deductions/Exemptions not available to Companies Opts for 115BAA or 115BAB

For availing the benefits of section 115BAA & 115BAB, Companies has to foregone/Not Allowed exemption/incentive as mentioned below:

> Section 10AA of the Act relating to SEZ.

>  Additional depreciation allowance under section 32(1)(iia) of the Act.

>  Section 32AD of the Act – Deduction for investment in new plant and machinery in notified backward States.

>  Section 33AB of the Act – Tea/ coffee/ rubber development allowance.

>  Section 33ABA of the Act– Site restoration fund.

>  Sections 35(1) (ii), (iia),(iii) and 35(2AA), (2AB) of the Act – certain scientific research expenditure.

> Section 35AD of the Act – Deduction in respect of expenditure on specified business.

> Section 35CCC of the Act – Expenditure on agricultural extension project.

>  Section 35CCD of the Act – Expenditure on skill development project.

>  Deduction under Part C (Deductions in respect of certain incomes) of Chapter VIA (Like 80IA/80IB/80IC etc.) However, Deduction u/s 80JJAA shall be allowed.

Further it is worthwhile to note that Finance Act, 2020 Introduce new section 80M w.e.f AY 2021-22 regarding the Deduction related to Inter-Corporate Dividends. Consequential amendments is also made under the Section 115BAA & Section 115BAB to include therein allowbility of  Deduction u/s 80M w.e.f AY 2021-22 to the companies covered under 115BAA/115BAB. Hence w.e.f AY 2021-22 both deduction of Section 80JJAA and Section 80M shall be admissible to such companies.

Important Note:

(i)  Set off of Loss/Carried Forward of Loss/Depreciation as related to above mentioned sections from earlier years shall not be allowed to set off u/s 115BAA.

(ii) In case of amalgamation, losses of amalgamating companies treated as losses of new amalgamated company u/s 72A, such losses shall also be not allowed to be set off as per section 115BAA/115BAB.

Concluding Remarks:

After introduction the reduced rates for the corporate tax payers, the claim of the Government is right that, India is seen as Globally Competitive and favoured destination of the Investment and these reduced rates are now among the lowest in the world. If we look by region, Europe has the corporate tax rate at 19.35%, the average tax rate in Asia (21.09%), the Americas (27.21%), and Africa (28.24%). Now, It is the matter of time to see up to what level government will succeed in its ambition of attracting the companies in India to “Make in India”.

Author Bio

Qualification: CA in Practice
Company: N G R & Associates
Location: FARIDABAD, Haryana, IN
Member Since: 10 May 2020 | Total Posts: 7
Nishant Singla is Fellow Member of Institute of Chartered Accountants of India (ICAI) M. No. 536056 . He has completed his Chartered Accountant Course in the Year 2014; he has also completed Certificate Course of Valuation of Shares conducted by ICAI in the year 2015 View Full Profile

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