Salient features of section 115BAA of the Income tax Act. 1961 (status as on 30th March 2020) as amended by Finance Act 2020 and as approved by the President of India on 27th March 2020.

Background:

Inorder to promote growth and investment and to be competitive as a nation (especially with respect to tax rates), Government of India has introduced a new section 115BAA in the Income Tax Act which provides a lower rate of taxation @ 22 % for domestic companies. This section was introduced through an ordinance (during September 2019) and was subsequently confirmed (with minor modifications) by an Act of Parliament during December 2019 via The Taxation Laws (Amendment) Act, 2019.Some further minor modifications in the section was made through the Finance Act, 2020 as well. The conditions and salient features of this new section are enumerated below.

1) Major benefits under this section:

a. Income is subject to tax at 22 % plus sc of 10 % and cess of 4 %, thus ETR would be 25.17 % irrespective of amount of income.

b. Provisions of MAT not applicable, ie the entity will not be forced to pay tax under MAT if it opts for section 115BAA. Please note that MAT rate has been reduced from 18.5 % to 15 % with effect from fy 2019-20 itself.

2) Applicability:

a. This section is applicable from the financial year 2019-20

b. It is applicable only to domestic companies (it is not applicable to foreign companies, firms, llp, individuals AOP etc)

3) How to avail benefits under this section:

a. The benefit under this section is to be exercised prior to the due date for filing the return of income for the fy 2019-20;

b. The form and rules for exercising this option is yet to be notified;

c. Such option is to be exercised before 30th September or 30th November for companies without international transactions/SDT or with such transactions as the case may be.

d. Thus if a company fails to exercise this option prior to this date and files its return of income after these due dates but prior to the following 31st March (belated return) then the company will lose its right to opt in to this section.

4) Conditions to be complied with by a company for opting into this section:

a. The assesse is a domestic company;

b. The company is required to pay income tax;

c. The following deductions cannot be claimed by the company

10AA Deduction for units in SEZ
32(1)(ii) Accelerated depreciation
32AD Investment in new plant in notified backward area
33AB Tea, coffee and rubber development account
33ABA Site restoration fund
35(1) Expenditure on scientific research
35(2)AA Deduction for amt paid to University, IIT, National Laboratory to be used for scientific research
35(2AB) Weighted Deduction in respect of amounts incurred on in-house scientific research
35AD Deduction in respect of expenditure on specified business (cold storage, warehouse for agri, specified hospitals, hotels, slum development etc
35CCC Extension on agricultural extension project
35CCD Expenditure on skill development project

d. If the company has any carried forward loss on account of the above deductions, then such losses cannot be set off against income for the year;

e. If the company has any carried forward loss from an amalgamating company on account of the above deductions, then such losses cannot be set off against income for the year – Sec 72A;

f. The above losses at (d) and (e) above shall be deemed to have been allowed and shall not be eligible for carry forward and set off in subsequent years – this means that if a company opts out of 115BAA, eventhen it will not be able to claim set off of the above losses. It will be lost for ever once it opts into 115BAA;

g. Only normal depreciation can be claimed, additional/accelerated depreciation cannot be claimed;

h. The company cannot claim any deduction under chapter VIA of the act other than under 80JJAA – deduction in respect of employment of new employees, 80M – deduction for inter corporate dividend (effective from fy 2020-21).

i. While opting in for 115BAA, there seems to be some confusion on whether the company can claim deduction u/s 80G or not for fy 2019-20. While dealing with 115BAA, the FM in the Taxation laws (amendment) act, 2020 in December 2019, had permitted deduction u/s 80G for fy 2019-20. However strangely in the Finance Bill, 2020, notes on clauses this deduction was not available for fy 2019-20. Adding to the confusion the Finance Act, 2020 while amending section 115BAA seems to have restricted this deduction from fy 2020-21 onwards. The position as of now is that 80G can be claimed for fy 2019-20, but cannot be claimed for fy 2020-21. Not sure if this is intended or un intended change. This would affect companies who are required to comply with CSR regulations and who intend to give contributions to entities providing benefit u/s 80G. Going forward (from fy 2020-21) if a company chooses 115BAA 80G would not be available.

5) Other points to note:

a. There is no restriction on turnover or whatsoever to claim this benefit;

b. There is no necessity that it should be a new business, any existing company can migrate into this section at any point in time.

c. There is no restriction on time (there is no sun set clause) for opting into this section. A company can opt into this section anytime in the future commencing from fy 2019-20

d. Income of the nature covered under Chapter XII would be subject to tax at scheduler rates mentioned in those sections, ie STCG (111A) @ 15 %, LTCG (112) at 10 % or 20 %, 112A @ 10 %, dividend from foreign companies (115BBDA) at 15 % etc

e. For such income as above (scheduler income) regular surcharge at rates in force as per Finance Act would get attracted and not SC at 10 %.

f. MAT credit as on 31st March 2019 will not be eligible to be set off once a company chooses to avail 115BAA;

g. However the company may retain its MAT Credit in its ITR so that if a situation arises in future when it wants to exit 115BAA, it can claim MAT credit subject to provisions of section 115AJAA;

h. If a company opts out of this section (by breaking any of the conditions which need to be complied), it would be a permanent opting out, it would never ever again in its life be able to come back to section 115BAA.

i. There is no specific provision in the section for opting out of the section, once opted in.

j. If a company has an unabsorbed depreciation as on 31-3-2020 and if it opts into 115BAA, then the wdv of the block as on 1-4-19 can be adjusted to this extent in the manner prescribed. Here the point to note is that if a company chooses to opt into 115BAA in a year after fy 2019-20, then it seems that this adjustment cannot be done. CBDT needs to clarify this point.

k. If a company has carry forward unabsorbed depreciation on account of additional/accelerated depreciation, such amount would lapse. The above adjustment for normal depreciation would not be available for the additional depreciation. Such companies may stay in the existing tax regime, exhaust the mat credit and/or additional depreciation and then study the ETR and move into 115BAA.

l. Business loss other than those arising out of 4 (c ) above are permitted to be carried forward for set off even after a company opts for the concessional regime under section 115BAA.

m. Capital losses are protected, ie if a company has past long term or short term capital losses, those losses can be carried forward for set off even though the company might have opted in for section 115BAA.

(The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advise after a thorough examination of the particular situation.)

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Qualification: CA in Practice
Company: K S JAGANNATHAN & CO
Location: Chennai, Tamil Nadu, IN
Member Since: 06 Apr 2020 | Total Posts: 2
I am a 3rd Generation Chartered Account and Partner of K S Jagannathan & Co. Have been in continuous practice for the pas 29 years. Focussed on taxation, audits and corporate consulting View Full Profile

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6 Comments

  1. Shashank Doshi says:

    If the special rates applicable to transaction like long term capital gain. Still MAT is not applicable if this option of 115BAA is exercised

  2. Shashank Doshi says:

    If the special rates applicable to transaction like long term capital gain. Still MAT is not applicable if this option of 115BAA is ecercised

  3. Vidya Jain says:

    In FY 19-20, A Public. Ltd. it has loss of Rs 1 crires which include 3 lacs Deprecation loss).
    Can we opt for 115BAA in FY 19-20? so that we can Setoff of brought forward loss in FY 20-21?. Please advice urgent

  4. Krishnamurthy Varadharajan says:

    Dear Sir

    Thanks for the Article published in Tax Guru. Very informative.

    I have a small query with regard to the Section 115BAA

    Conditions to be complied with by a company for opting into this section:
    a. The assesse is a domestic company;

    b. The company is required to pay income tax;

    c. The following deductions cannot be claimed by the company

    My client’s IT Computation is detailed Below :

    Net Profit Before Tax Rs. 1.00 Lakh
    Add : Co’s Act Depn Rs. 0.50 Lakh
    Less : IT Depn Rs. 2.50 Lakhs

    Gross Total Income Rs. 1.00 Lakh ( Loss )

    In the above scenario whether the Company is eligible to opt this Section 115BAA
    Please Clarify sir

  5. Pradip says:

    A Pvt. Ltd. Incorporated on 01-06-19. In FY 19-20, it has loss of Rs 10 Lacs (which include 3 lacs Deprecation loss).
    If we opt for 115BAA for FY 19-20, can we Setoff of brought forward loss in FY 20-21?

  6. ca.amit.rank says:

    Comment on Accelerated Depreciation claim:
    Restriction is only for additional depreciation u/s 32(1)(iia); there is no bar in claiming accelerated rate of depreciation u/s 32(1)(ii) read with rule 5(2). Kindly refer clause (i) & (iv) of sub section (2) of section 115BAA.

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