In this article attempt is made to discuss and summarise the changes in the Tax Rate for Domestic Companies after introduction of The Taxation Law (Amendment) Act 2019 which received the assent of the President on 11th December 2019.

Detailed discussion of the newly incorporated provisions and existing provisions has been done in the subsequent points.  To initiate the thought process, it is important to know:

(a) Current rate of tax rate of domestic companies,

(b) Comparative summary of newly inserted provisions along with section 115BA and

(c) Comparative tax rate under three provisions.

A) Tax Rate for DOMESTIC COMPANY in India are summarised in table below:

Taxable Income (in INR) Tax Rates
Gross receipts/Turnover is up to Rs. 400 Crores in previous year 2017-18 25%
Section 115BA: Tax on income of certain manufacturing domestic Company 25%
Section 115BAA*: Tax on income of certain domestic Company 22%
Section 115BAB*: Tax on income of new manufacturing domestic company 15%
Any other Domestic Company 30%

 * Newly inserted w.e.f. previous year 2019-20 vide The Taxation Laws (Amendment) Act 2019.

B) Comparative analysis of three provisions is as under:

Particulars 115BA 115BAA 115BAB
Eligibility of Nature of Business Manufacturing No restriction on nature of business Manufacturing
Eligible for Existing or New Entity Any Entity Any Entity Entities setup after 1.10.2019
Tax Rate 25% 22% 15%
Tax on various other income Same as above Same as above 22%
Tax Rate of STCG on depreciable asset Same as above Same as above 22%
Income Taxable at Special Rate u/s 111 to 115BBG No Change in Tax Rate for such Income
Surcharge 7% or 12% 10% flat 10% flat
Splitting up/Reconstruction Entities Eligible to opt Eligible to opt Not Eligible to opt
Installing ‘Used’ Machine/Plant No restriction No restriction Not Allowed beyond 20%
When to exercise option? Any previous year Any previous year FIRST tax return
Restrictions on certain Deduction/Exemption Yes Yes Yes
Tax Payable under MAT Yes @ 15% No No
MAT Credit brought forward (b/f) Allowed to be claimed Not allowed to claim
MAT Credit b/f Lapses? Does not Lapse Lapses
Withdrawal of Option Not Allowed

(subject to opting section 115BAA)

Not Allowed Not Allowed

C) Comparison of Tax Rates with Surcharge and Cess:

Particulars Turnover upto INR 400 Crore in FY 17-18 115BA 115BAA 115BAB Others
Tax Rate 25% 25% 22% 15% 30%
Surcharge (SC) Slab wise* Slab wise* Flat 10% Flat 10% Slab wise*
Health and Education Cess (HEC) 4% 4% 4% 4% 4%
Income Level
upto 1 Crore 26.00% 26.00% 25.17% 17.16% 31.20%
1 Crore to 10 Crore 27.82% 27.82% 33.38%
More than 10 Crore 29.12% 29.12% 34.94%
 MAT Applicable Applicable NA NA Applicable
Restriction to claim certain deduction/exemption NA Applicable Applicable Applicable NA

* Surcharge – Income upto 1 Crore – NIL, from 1 crore to 10 Crore -7%, above 10 Crore – 12%

D) Analysis and Discussion

There are many conditions, restrictions provided under the provisions.  Accordingly, it’s a very crucial task to decode the provisions and check it’s applicability to a particular domestic company.

For ease of understanding, we can divide the Domestic Company in 3 class:

I] Existing Manufacturing Business

II] New Manufacturing Business

III] All Other Business

I] Existing Manufacturing Business

Section 115BA is applicable to existing Manufacturing business where the rate of tax is 25%.   For existing Manufacturing company who has already opted for section 115BA, has options like (a) continue with Section 115BA – 25% tax, (b) opt for Section 115BAA – 22% tax rate.  The special rate of tax prescribed in Section 111 to Section 115BBG shall continue to apply on entities covered u/s 115BAA.  It is apparent that, rate of tax of Section 11BAA is lower.  Moreover, if the entities are planning to diversify the business then they may opt for section 115BAA as, restriction has been provided by Section 115BA for not conducting any other business except manufacturing.

Further, most of the restrictions on claiming exemption/deduction of both these sections are similar. Further, the brought forward loss or unabsorbed depreciation to the extent that it relates to such restricted exemption/deduction will also not be allowed to be claimed.

The tax rate of MAT is reduced to 15% and relief from applicability of MAT to companies opting for Section 115BAA is also being provided under amendment.  The rate of surcharge on companies opting for section 115BAA shall be 10% irrespective of the amount of income as against the slab wise rate of 7%/12% applicable for section 115BA. The Company opting for Section 115BAA will not be allowed to claim brought forward MAT Credit.  Nevertheless, litigation around the claim of brough forward MAT Credit cannot be ruled out as there could be a possible argument that the right to claim MAT Credit has already been vested with Company and such right can’t be denied by a subsequent amendment.

It is clearly mentioned in section 115BA that option once exercised cannot be withdrawn. However, a new proviso in section 115BA has been added that “where the person exercises option under section 115BAA, the option under this section may be withdrawn”. Accordingly, existing company may exercise the option for section 115BAA.

Here it can be noticed that for existing Manufacturing business, we analysed the position with respect to Section 115BA and Section 115BAA.

II] Newly setup Manufacturing Business (set up after 1.10.2019):

If the Company has formed and setup after October 01st, 2019 and commences manufacturing before March 30, 2023 then, it can opt for taxability at 15% under section 115BAB.  However, the option needs to be exercised in the FIRST return of income to be filed by such Company.  Provisions have clearly indicated that the income which are not from manufacturing activity shall be taxable at 22% and no deduction or allowance of any expenditure shall be allowed to be claimed while computing such income. Special rate of tax prescribed in Section 111 to Section 115BBG shall continue to apply on entities covered u/s 115BAB. There are lot of litigations around the definition of term “Manufacturing”; the provision of section 115BAB clearly excludes Development of Computer Software, Mining, Printing of Books or production of cinematography etc. as ‘Manufacturing’ activity.

Company is not allowed to claim certain exemptions/deductions u/s 115BAB.  Further, the brought forward loss or unabsorbed depreciation to the extent that it relates to such restricted exemption/deduction will also not be allowed to be claimed u/s 115BAB.

Provisions of Specified Domestic Transactions are applicable on the person covered u/s 115BAB.  If the Assessing Officer determines that the entity covered u/s 115BAB has earned profit in excess of reasonable amount then, such excess amount shall be chargeable to tax at 30%.

Accordingly, the analysis for Newly set up manufacturing business will have to be done between Section 115BAB, Section 115BAA and the General rate of tax (Provision and mechanism of taxability in general – We are already aware of such provisions and hence not discussed here).  Both these sections provide similar restrictions on claim of certain deduction or exemptions.  Further, section 115BAB puts further restriction on use of “used” plant and machinery up to 20% of total value of plant and machinery. Section 115BAB also puts restriction on formation of entity by splitting up or reconstruction of existing entity.  There is already a lot of debate around the word ‘Plant and Machinery’ and meaning could be derived from the judgements pronounced on existing provisions of the Act where similar provision are present.

The additional benefit of opting section 115BAA or 115BAB is that provisions of MAT will not be applicable and question of claiming brought forward MAT Credit in the 1st year of filing return does not arise.

Accordingly, the newly setup undertaking needs to analyse the provisions of section 115BAB and Section 115BAA and thereafter wisely exercise the option.  The Company which has exercised the option u/s 115BAB and its not able to satisfy the conditions or restrictions at any future date then, Company may exercise the option u/s 115BAA. This indicates that the conditions mentioned u/s 115BAB needs to be tested every year.

No doubt that entities are required to analyse the tax implication under normal provisions of the act viz-a-viz section 115BAA/115BAB. Multiple parameters like, Outflow under MAT, Outflow due to non-availability of certain Exemption/Deduction, difference in the tax rates, etc. will have to be analysed in detail by company before exercising any particular option.

The restriction on claim of certain exemption/deduction, as referred u/s 115BA/115BAA/115BAB are:

section 10AA or clause (iia) of sub-section (1) of section 32 or
section 32AD or section 33AB or
section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or
section 35AD or section 35CCC or
section 35CCD or under any provisions of Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” other than the provisions of section 80JJAA and section 80LA, if applicable.

III] Other Domestic Companies:

If the turnover of the domestic company is up to 400 Crore:

Such companies have options like (a) Pay tax at 25%, (b) opt for section 115BAA with 22% tax rate. Tax rate of 22% is applicable on Total Income of a Domestic Company except to the income which are chargeable to tax at special rate under section 111 to section 115BBG. There are restrictions on claim of certain deduction in section 115BAA and at the same time it has the benefit of exemption from MAT.  The brought forward MAT credit shall get lapsed under section 115BAA which is not the case with normal provisions of the Act. Further, vide circular no 20 dated 2nd October 2019 it has been clarified that the option under section 115BAA can be exercised in any previous year. Company having MAT credit, if it so desires, exercise the option after utilising the credit.  This is big relief for certain company who wish to exercise the option u/s 115BAA at later date.  It is also to be noted that, the brought forward loss or unabsorbed depreciation to the extent that it relates to such restricted exemption/deduction items will not be allowed to be claimed u/s 115BAA.

Accordingly, the Company also needs to analyse the tax outgo under normal provisions vs scheme of section 115BAA to arrive at the decision. I reiterate that, there are multiple parameters which will have to be analysed in detail by company before exercising particular option.

Other Companies:

Income shall be computed as per normal provisions of the Act considering the provisions of MAT.  The Rate of tax will be 30%. Company can claim all eligible deduction and exemptions.

E) Conclusion:

The reduction in base rate shall increase the retained earnings for stake holders.  No doubt that the analyse of effective tax rate need to factor the impact of Dividend Distribution Tax and Tax on Dividend in the hands of Shareholders.  After the relief provided to Corporates, it’s worth to analyse the effective tax rate of LLP v/s Company under a particular fact of the case and then appropriately select the suitable Entity structure.

There are still certain open issues which are worth considering like (a) what will be the impact on Tax Return which are filed by assessee for subsequent period, when the assessing officer determines that the scheme u/s 115BAB is not available for any previous year; it is interesting to analyse the meaning of phrase ‘such person may exercise option’ used in proviso to section 115BAA(5); (b) what is the meaning of the term ‘total value’ while considering the limit of 20% for put to use of ‘used’ plant and machinery i.e. Value means WDV or Fair Market Value or Cost.

I believe this article will be useful to initiate the thought process for analysing the tax position of your company / your clients and opting for suitable option and to consider such option while calculating the Advance Tax during FY 2019-20.

The information contained herein is of a general nature and is not meant to address the circumstances of any particular person. Although we try to provide accurate information, there can be no guarantee that such information is accurate as of the date it is received or in the future. We take no responsibility of any loss or damage that may cause due to reliance on this information.  One must not take any action/decision based on such information without appropriate professional advice after a detailed study of a particular case.

(Author, Utkarsh Mehta, Practicing Chartered Accountant can be contacted at [email protected] @ +91 9833884464)

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