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Section 115 BAA by Finserv MARKETS

What is Section 115BAA - New Tax rate for Domestic companies?

Regular post-retirement income | Additional tax benefit on investments up to ₹50,000 u/s 80CCD (1B) - EEE Category | Regulated by PFRDA (Pension fund regulator under Ministry of Finance, Govt. of India)

Section 115BAA, established through an ordinance in 2019, was brought into existence by the State Government. Also called the ‘Taxation Amendment Ordinance’, this provision took effect from September 20 2019. The central objective of the introduction of this section was to mitigate the tax rates imposed on the domestic corporations, thereby making it easy for them to perform their business activities under the Government of India scheme. 

 

This article focuses on the comprehensive description of the Section 115BAA of Income Tax Act (ITA), 1961. Read on to know why this provision was introduced and other important information associated with it.

What is Section 115BAA?

The Income Tax Act, 1961 underwent an amendment to include Section 115BAA, providing a lowered corporate tax rate to domestic corporations. The enterprises can pay the tax at a rate of 22% in addition to the surcharge of 10% and 4% cess under this Section. This implies that these companies can choose to not pay the minimum alternate tax in case they decide to pay the tax under this section. This tax rate came into effect from the financial year 2019-2020.

Detailed Analysis of Section 115BAA

The provisions of Section 115BAA are as follows:

 

Section 115BAA(1):

According to the provisions of Chapter XII, besides the ones mentioned under Section 115BA and Section 115BAB, the income tax payable with respect to a person’s total income, for any previous financial year in relevance to the assessment year which begins on or after 1st April 2020, will be computed at 22%, if all the conditions mentioned under subsection (2) are satisfied.

 

Let’s look at a few of the special income tax rates of certain transactions under this chapter:

Nature of transaction

Applicable Section

Tax on Long Term Capital Gains 

112

Tax on Short Term Capital Gains in certain cases

111A

Tax on dividends, royalties, and fees for technical services in case of foreign companies

115A

Tax on Long Term Capital Gains in certain cases  

112A 

Tax on income from bonds or GDRs purchased in foreign currency or capital gain arising from their transfer

115AC/ 115ACA

Tax on winnings from lotteries, crossword puzzles, and races including horse races

115BB

Tax on income from virtual digital assets 

115BBH

Tax on income from transfer of carbon credits

115BBG 

The above provision clarifies that the rates of the special tax contained for several transactions in Chapter XII will be applicable to a company which opts for this new regime of tax under Section 115BAA. Once a company opts for the concessional tax rate under Section 115BAA of Income Tax Act, it won’t be able to choose the concessional tax rate under similar sections 115BA or 115BAB.

 

Proviso to Sub-section (1): Subs-ection 2 of Section 115BAA states that the domestic corporation which opts for the concessional tax regime under Section 115BAA must comply with certain conditions. 

 

Proviso to Section 115BAA(1): states that if the corporation is not able to comply with these conditions in any previous financial year, this option stands invalid for the current and the subsequent assessment years. Also, their income will also be assessed to make sure that they have not exercised this option for the reduced tax rate for that and the subsequent assessment period.

 

Section 115BAA (2):

As mentioned earlier, a domestic corporation is eligible to opt for the concessional tax regime under this section in accordance with the conditions as mentioned in sub-section (2) u/s 115BAA. 

A domestic corporation must forego the below mentioned exemptions or deductions if it chooses the concessional tax regime u/s 115BAA:

Section

Deduction or exemption which needs to be foregone if Section 115BAA is opted for

10AA

Deduction to new units that have been established in SEZ

32(1)(iia)

Benefits of accelerated depreciation of 35% or 20%

32AD

Investment Allowance for investment in machinery and plant in the backward areas that have been notified 

33AB

Deduction related to the development account of coffee, tea, or rubber coffee

33ABA

Deductions that are related to the site restoration fund

35(1)

  • (ii) Deduction related to the sum which is paid to specific research associations in a college, university, or any other research institution. 

  • (iia) Deduction related to the sum which is paid to a corporation in order to be used to scientific research

  • (iii) Deduction related to any sum which is paid to specific research associations, university, or an institution that researches in the field or social sciences or statistics 

35(2AA)

Deductions related to a sum which is paid to either a national lab, university, IIT, or a specific person who will be used for scientific research to be undertaken in a program that has been approved of

35(2AB)

Deductions related any kind of expense that has been incurred on in-house scientific development and research facility by a corporation which is engaged in the business of manufacture of article, production of article, biotechnology, as specified in the Eleventh Schedule

35AD

Deductions related to the depreciation on account of capital expenses on certain specified business

35CCC

Deductions related to the project of agricultural extension 

35CCD

Deductions related to the expenses on the project of skill development

Deductions under Chapter VIA

A domestic corporation which opts for Section 115BAA will not take deductions mentioned under Chapter VIA. However, below mentioned deductions can be undertaken:

  • Section 80JJAA: Deductions with respect to new employees’ employment

  • Section 80M: Deductions with respect to the inter-corporate dividends

Note: Till assessment year 2020-21, the deductions under Section 80G and 80GGB were also available.

(ii) Furthermore, if a domestic corporation chooses Section 115BAA, it should calculate its total income without setting off any loss carried forward or deduction from an assessment year prior to this, if such depreciation or loss is attributable to any deduction mentioned above.

(iii) The total income should be calculated without setting off any allowance or loss for unabsorbed deduction deemed so u/s 72A, if such depreciation or loss is attributable to any deduction mentioned above. 

Note: Section 72A is related to the carry forwarding or setting off the cumulative loss or unabsorbed deduction in demerger or amalgamation.

(iv) The total income of a corporation which opts for Section 115BAA should be calculated by allowing the deduction, if at all, according to the provisions of Section 32 (besides the additional depreciation under Section 32 (1) (iia)). 

 

Note: A corporation which opts for Section 115BAA is allowed to claim the deduction but it will not be allowed to claim the additional deductions. Furthermore, if any carried forward deduction or loss is there as an additional depreciation, it will lapse.

Section 115BAA (3):

When a corporation chooses Section 115BAA of Income Tax Act, the unabsorbed depreciation or losses for the previous years which are related to the ineligible deductions u/s 115BAA (2) will lapse and they will not be able to claim such depreciation or losses in the subsequent years.

 

The taxpayers are confused about the issue that the entire carried forward depreciation and losses will stop being deductible. However, this has been clarified that there isn’t any kind of restriction in carrying forward and setting off of depreciation or losses for a corporation which opts for Section 115BAA. The only restriction is with respect to the items ineligible according to Section 115BAA (2).

 

Proviso to Sub-section (3): This prescribes that a domestic corporation that has unabsorbed deduction should make the corresponding adjustment to the written down value (WDV) of such blocks of assets as of 1st April 2019. This is valid if the corporation exercises the option of Section 115BAA.

 

 

Section 115BAA (4):

 

If a domestic corporation chooses the tax regime u/s 115BAA, it isn’t allowed to reap the benefits of the deductions under the Chapter VIA while calculating its total income. The sole exceptions given by Section 115BAA  (2) are the deductions that are mentioned u/s 80JJAA and 80M. 

 

Section 80LA of the ITA allows a deduction of 100% to a unit in the Indian Financial System Code (IFSC) with respect to the income as mentioned in subsection (2) of this particular section. If a unit in IFSC chooses the deduction under Section 115BAA, it will be required to let go of the benefit of deduction under Section 80LA with respect to the Section 115BAA(2). Here’s when subsection (4) comes into play.

 

According to the subsection 4 of Section 115BAA, the unit in the IFSC which opts for Section 115BAA will be allowed to reap the benefits of deductions under Section 80LA up to 100% of its income for a consecutive span of ten years out of the initial 15 years. Hence, a unit in the IFSC can deduct the below mentioned deductions while calculating its total income:

 

  • Normal Depreciation

  • Deduction under Section 80M

  • Deduction under Section 80JJAA

  • Deduction under Section 80LA

 

Section 115BAA (5):

  • This subsection states that a domestic corporation can avail the benefit of concessional tax rate only when they exercise the option.

  • They can exercise the option by filing form no. 10-IC on or prior to the last date of doing so as prescribed under Section 139(1) of the ITA.

  • Once they exercise the option, it cannot be withdrawn for the current and the subsequent assessment years.

Proviso to Section 115BAA (5): If a corporation had exercised the option under Section 115BAB earlier and it was invalidated because of any of the causes mentioned above, it can now go for Section 115BAA. Owing to the invalidation under a certain section doesn’t disqualify the corporation from opting for a benefit under some other section. Both the sections, 115BAA and 115BAB, operate independently. 

Features of Section 115BAA

Here’s a list of features of this section:

 

  • Optional system.

  • Corporations can opt out of concessional tax and return to the prior tax regime.

  • Tax rate is 22%+ including the additional cess and surcharge.

  • In order to be eligible to choose to be a part of Section 115BAA, the corporations must opt out of the Maximum Alternate Tax (MAT).

Eligibility Criteria

Domestic corporations can pay the income tax under those introduced u/s 115BAA. However, they are required to fulfil certain criteria to be eligible for the same. Below mentioned are a few conditions they must fulfil:

 

  • The corporations which pay tax u/s 115BAA are not allowed to ask for other exemptions or incentives under another provision of the Income Tax Act, 1961. They must calculate their total income without having claimed the following:

 

  1. Deductions available for corporations established in special economic zones under section 10AA.

  2. Deductions u/s 33AB for corporations engaged in rubber, tea, or coffee.

  3. Deductions u/s 32 and investment allowance under section 32AD for new machinery or plan in particular backward regions of Telangana, West Bengal, Bihar, and Andhra Pradesh.

  4. Deductions falling u/s 35AD for capital expenses of particular businesses.

  5. Deductions under Section 35 for expenditures owing to the scientific research to certain universities.

  6. Deductions for the deposits which any corporations associated with the fossil fuel extraction makes to a certain site restoration fund according to Section 33ABA.

  7. Deductions according to Chapter VI-A on specific incomes, which are permissible u/s 80AC, 80IB, 80IAC, 80IA, and several others. Exceptions also include deductions according to sections 80M and 80JJAA.

  8. Deductions falling u/s 35CCC for any kind of skill development or agricultural extension project.

  9. Any depreciations or losses carried forward from the previous financial year, in alignment with the deductions mentioned above.

  10. Losses which are carried forward by an amalgamation of certain companies or any deduction of the amalgamating company if they take place in alignment with the deductions mentioned in the above pointers.

  • Corporations are not allowed to claim any set off for losses which are mentioned above, provided they choose the new tax rates u/s 115BAA.

  • Domestic corporations must choose this tax regime either on or before the last IT returns filing dates. (Last Date: 30 September of a specific assessment year). Please note that it cannot be withdrawn or changed after opting for taxation under this section.

  • There are zero restrictions with respect to the turnover of a domestic corporation.

  • Existing as well as new companies can choose taxation u/s 115BAA.

Appropriate Time to Choose Section 115BAA

Section 115BAA came into effect from the assessment year 2020-2021. Post this, it can be exercised for the following assessment years. The corporation must choose it by filling the form 10-IC because this section is an optional taxation system.

 

A particular corporation can choose to apply for this option in any assessment year since there are no particular limitations on the time for being able to choose this option. However, once you choose this option, it cannot be changed or withdrawn after this. 

 

However, if a corporation is not able to comply with these specified conditions, this scheme would become invalid for the present and the subsequent assessment years. They will not be eligible to use this option any longer.

How to Exercise Section 115BAA

According to Rule no. 21AE of the ITA, the corporations can exercise the Section 115BAA. In order to opt for this option, they have to file form 10-IC of the ITA. It mainly comprises the choices to be made and the needs which are required to be submitted online through an e-verification code or a digital signature certificate. 

 

It must be filed either on or prior to the due date of income tax return filing u/s 139(1) of the Internal Revenue Code, 1962. The deadline is 30th of November of every assessment year for the domestic corporations which are subject to Transfer Pricing rules and 31st of October for other companies.

 

Every domestic company has an option of paying their income tax at 22% rate if the following conditions are met.

Conditions of Section 115BAA of Income Tax Act

According to this new regime of taxation, every domestic company can pay their income tax with a rate of 22% (applicable cess + surcharge). However, these corporations need to take into account the below mentioned deductions under the Income Tax Act, 1961:

 

  • Deductions u/s 10A for Special Economic Zones (SEZ).

  • Deductions u/s 35 for expenditure for scientific research paid to any university.

  • Deductions falling u/s 33AB for tea, rubber, and coffee.

  • Deductions falling under Chapter VI A, besides the sections of 80 LA, 80JJAA, and 80M.

  • Capital expenditure of a particular business u/s 35AD.

  • Concessions owing to the losses and unabsorbed depreciation falling u/s 72A.

  • Deductions falling u/s 35CCC and 35CCD for expenses incurred due to the skill development programmes or agriculture extension projects.

  • Additional depreciation falling u/s 32A and investment allowance for setting up industries (Section 32AD) in the backward areas of Telangana, Bihar, West Bengal, and Andhra Pradesh which are notified.

New Effective Tax Rates

The new rate of income tax for the domestic corporations u/s 115BAA is 25.168%. Here is a table which shows the breakdown of the new rate of tax under this section in detail:

Base Tax Rate

Applicable Surcharge

Effective Tax Rate

Cess

22%

10%

22×1.1×1.04= 25.168%

4%

The corporations which opt for the taxation system according to the tax rates of this section are not required to pay the Minimum Alternate Tax (MAT).

Comparison of Effective Tax Rate

Total Income

Effective Tax Rate (inclusive of surcharge and cess)

Effective Tax Rate (inclusive of surcharge and cess)

 

Companies opting for Section 115BBA

Companies which do not opt for Section 115BBA

Up to Rs. 1 crore

25.17%

26%

More than Rs. 1 crore but up to Rs. 10 crores

25.17%

27.82%

More than Rs. 10 crores

25.17%

29.12%

The effective tax rate for a corporation which opts for Section 115BAA is slightly lesser, however, these companies cannot claim other tax benefits mentioned under the ITA, 1961. If a corporation does not choose Section 115BAA, they can claim few deductions, exemptions, incentives, and other depreciations mentioned in the ITA, 1961.

Conclusion

The domestic corporations which are looking to reap the benefits of the reduced rates on income tax u/s 115BAA of Income Tax Act, 1961 are required to fulfil a few requirements in order to be eligible for choosing such rates. Existing companies can switch to the tax rates mentioned in this section whenever they want. However, if they opt for a new taxation system over the already existing one, they cannot reap the benefits of other benefits available in the ITA.

FAQs

  • ✔️Which corporations can opt for Section 115BAA?

    Domestic corporations which fulfil the eligibility criteria can opt for concessional tax rates under this section. Partnership firms, LLPs, individuals, foreign companies, AOPs, and BOIs cannot enjoy the benefits of reduced tax rates u/s 115BAA.

  • ✔️How to opt for Section 115BAA?

    You can opt for Section 115BAA of Income Tax Act, 1961 electronically according to its Rule 21AE.

  • ✔️Is a foreign company eligible to opt for Section 115BAA?

    No, foreign companies are not eligible to opt for the reduced tax rates u/s 115BAA.

  • ✔️Can MAT be applied to a company opting for Section 115BAA?

    No, according to Section 115JB (5A) of the ITA, Minimum Alternate Tax (MAT) cannot be applied to a company which opts for Section 115BAA or 115BAB.