Section 115BAA: Whether to continue or forego MAT/AMT Credit?

Section 115BAA states that domestic companies have the option to pay corporate tax at the reduce rate of 22% from FY 2019-20 onwards. Isn’t it a great benefit for the domestic companies to save around 3% on their tax expenses? But wait this benefit comes with its own costs. Domestic companies can avail this benefit only if they do not avail any exemptions/incentives under different provisions of Income Tax while computing their total income such as-

  • Section 10AA(SEZ),
  • Section 33AB(Tea, coffee, rubber),
  • Section 33ABA(Prospecting or extraction or production of natural gas),
  • Section 35(Scientific Research),
  • Section 35AD(Specified Business),
  • Section 35CCC(Agriculture extension project),
  • Section 35CCD(Skill Development Project),
  • Additional Depreciation in respect of New plant and machinery or in Notified Backward Areas
  • Deduction under Chapter VI-A related to certain incomes except Section 80JJAA,
  • Further Claiming of Set-off of any brought forward losses or depreciation attributable to the above restricted provisions will not be allowed.

Let’s discuss this last point with an example:

Suppose in FY 2018-19 a company incurred a loss of 1,00,000/- under PGBP. Depreciation for that year was Rs 60,000 bifurcated into Rs 40,000/- as normal depreciation and Rs 20,000/- as additional depreciation. So while carrying forward, Rs 60,000/- will be treated as unabsorbed depreciation and Rs 40,000/- as business loss.

Now in FY 19-20, there is profit under PGBP of Rs 1,00,000/-before setting off brought forward losses and unabsorbed depreciation.

Particulars Without Section 115BAA Opting Section 115BAA
Business Income FY 19-20 1,00,000 1,00,000
Less: Business Loss FY 18-19 40,000 40,000
Unabsorbed Depreciation 60,000 40,000(Additional depreciation not allowed)
Income under PGBP NIL 20,000

Note:  Domestic companies have to avail the option of lower tax rate before the due date of filing income tax return, and the option once opted in particular financial year ,it cannot be withdrawn subsequently.

Further Section 115JB of the Income Tax Act .i.e. MAT will not be applicable to domestic companies opting to pay tax under Section 115BAA.So what will happen to MAT Credit available with such companies? Yes I know what you are thinking and I don’t like it either. The MAT Credit will lapse. 

So now the next important question: How should a company decide whether to continue availing the credit or forego it? Let’s understand this through an example.

Example: ABC Pvt Ltd company is intending to opt for Section 115BAA.It has an unutilised MAT credit of Rs 5 crores as per Income Tax Return filed for AY 2020-21(FY 19-20).

A) Present value of future tax liability if domestic company does not opt for Section 115BAA 

Figures in Lakhs

Step 1: Project the book profits as per MAT and total income as per Normal provisions of Income Tax. Such projections are required till the year in which MAT credit is fully utilised.

Particulars AY 2021-22 AY 2022-23 AY 2023-24 AY 2024-25 AY 2025-26
Book Profits computed for the purpose of MAT(Projections) 2,500 3,000 3,500 4,000 4,500
Total Income computed as per Normal Provisions of Income Tax Act(Projections) 1,400 2,500 2,700 3,500 4,700

Step 2: Calculate net tax liability of future years at current rates and then calculate the present value of the net tax liability as per applicable discounting rate.

Computation of present value of future tax liability if domestic company does not opt for 115BAA
MAT Liability @18.5 % of Book Profits 462.50 555.00 647.50 740.00  832.50
Add: Surcharge@12% 55.50 66.60 77.70 88.80 99.90
Subtotal 518.00 621.60 725.20 828.80 932.40
Add: Cess@4% 20.72 24.86 29.01 33.15 37.30
Total MAT Liability(A) 538.72 646.46 754.21 861.95 969.70
Tax as per Normal Provisions@25% 350.00 625.00 675.00 875.00 1,175.00
Add: Surcharge@12% 42.00 75.00 81.00 105.00 141.00
Subtotal  392.00  700.00  756.00  980.00  1,316.00
Add: Cess@4%  15.68  28.00  30.24  39.20  52.64
Total Tax Liability(B)  407.68  728.00  786.24  1,019.20  1,368.64
Tax Payable(Higher of A or B)  538.72  728.00  786.24  1,019.20  1,368.64
Less: MAT Credit(Minimum of Credit available or B-A if positive)  –  81.54  32.03  157.25  360.22
Net Tax Payable  538.72  646.46  754.21  861.95  1,008.42
Present Value Factor@10% 0.91 0.83 0.75 0.68 0.62
Present Value of Net Tax Payable 489.75 534.27 566.65 588.72 626.15
Total of PV of Net Tax Payable( C ) 2,805.53
MAT Credit Working Note
MAT Credit Brought Forward  500.00  631.04  549.50  517.47  360.22
MAT Credit of Current Year(A-B if positive)  131.04  –  –  –  –
MAT Credit Utilised (Minimum of credit available or B-A)  –  81.54  32.03  157.25  360.22
MAT Credit Carried Forward  631.04  549.50  517.47  360.22  –

B) Present value of future tax liability if domestic company opts for Section 115BAA 

Step 3: Calculate net tax liability of future years as per Section 115BAA and then calculate the present value of the net tax liability as per applicable discounting rate.

Computation of present value of future tax liability if domestic company opts for 115BAA
Tax on Total Income @22%  308.00  550.00  594.00  770.00  1,034.00
Add: Surcharge@10%  30.80  55.00  59.40  77.00  103.40
Subtotal  338.80  605.00  653.40  847.00  1,137.40
Add: Cess@4%  13.55  24.20  26.14  33.88  45.50
Total Tax Liability  352.35  629.20  679.54  880.88  1,182.90
Present Value Factor@10%  0.91  0.83  0.75  0.68  0.62
Present Value of Net Tax Payable  320.32  520.00  510.55  601.65  734.49
Total of PV of Net Tax Payable( D ) 2,687.00

Step 4: Calculate the net savings by computing the difference between figures computed in Step 2 and Step 3.If the difference is positive the company is better off in opting the new tax rate under Section 115BAA.If the difference is negative, the domestic company should defer the decision to opt for the new regime till the year in which such figure becomes positive.

Total of PV of Net Tax Payable( C ) 2,805.53
Total of PV of Net Tax Payable( D ) 2,687.00
Net Savings if Company Opts for Section 115BAA(C-D) 118.53

Conclusion : Since ABC Pvt Ltd is saving Rs 118.53 lakhs by opting new tax regime it should opt for it.

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Maharashtra, IN
Member Since: 02 Jan 2021 | Total Posts: 1

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