Analysis of Section 115BAA – New tax rate of 22% on domestic Companies

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1.The new section – Section 115BAA has been inserted in the Income Tax Act,1961 to give the benefit of a reduced corporate tax rate for the domestic companies. Section 115BAA states that domestic companies have the option to pay tax at a rate of 22% from the FY 2019-20 (AY 2020-21) onwards if such domestic companies adhere to certain conditions specified.

Conditions specified under eligibility criteria of section 115BAA

2.All domestic companies shall have an option to pay income tax at the rate of 22% (plus applicable surcharge and cess), provided the following conditions are complied with:

Such companies should not avail any exemptions/incentives under different provisions of income tax. Therefore, the total income of such company shall be computed without:

1 Section – 10AA Special provisions in respect of newly established Units in Special Economic Zones
2 Section – 32(1)(iia) Additional Depreciation   (it is pertinent to note that this restriction is only on additional depreciation and regular depreciation is permitted to be reduced from the total income of the assessee so long as it does not pertain to other deductions enumerated in this table)
3 Section 32AD Investment Linked Deduction
4 Section – 33AB Tea development account, coffee development account and rubber development account
5 Section – 33ABA Site Restoration Fund
6 Section 35 Expenditure on Scientific Research
7 Section 35 AD Deduction in respect of expenditure on specified business
8 Section – 35CCC Expenditure on agricultural extension project
9 Section – 35CCD Expenditure on skill development project
10 Chapter VI A No deductions under Chapter VI A can be made while computing the total income for the purpose of Section 115BAA, subject to the following exceptions:   a. Section – 80JJAA: Deduction in respect of employment of new employees. While all other deductions like 80C, 80G, etc cannot be availed while computing total income for the purpose of section 115BAA, there is no such restriction on section 80JJAA deduction. b. Section 80LA: Persons having eligible unit in the International Financial Services Centre referred to in section 80LA(1A) shall be allowed to claim deduction u/s. 80LA while computing total income for the purpose of section 115BAA. c. Section 80M: Deductions in respect of inter-corporate dividends. Inserted vide Finance Bill, 2020, this deduction can be availed w.e.f. AY 2021-2022 while computing total income for the purpose of section 115BAA.

Claiming a set-off of any loss carried forward or depreciation from earlier years, if such losses were incurred in respect of the aforementioned deductions

3.A claim by an amalgamated company for set-off of carried forward loss or unabsorbed depreciation belonging to an amalgamating company if such loss or unabsorbed depreciation is on account of the above deductions; claiming a deduction for additional/accelerated depreciation. The normal depreciation can however be claimed.

4.The above losses 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 the company opts for 115BAA then the opportunity for claiming set off is lost forever.

5.Such companies will have to exercise this option to be taxed under the section 115BAA on or before the due date of filing income tax returns.Once the company opts for section 115BAA in a particular financial year, it cannot be withdrawn subsequently.

The option should be in Form 10-IC, as notified by the CBDT. The form should be submitted online under a digital signature or under an electronic verification code.

6.The new effective tax rate, which will apply to domestic companies availing the benefit of section 115BAA is 25.168%. The break up such tax rate is as follows:

Base tax rate Surcharge applicable Cess Effective tax rate
22% 10% 4% 22*1.1*1.04 = 25.168%

Such companies will not be required to pay Minimum Alternate Tax (MAT) under section 115JB of the act.

Comparison of Effective Tax Rate (inclusive of surcharge and cess) where company opts for Section 115BAA or not:

Total Income Effective Tax Rate (inclusive of surcharge and cess) Effective Tax Rate (inclusive of surcharge and cess)
Co. opts section 115BBA Co. doesn’t opts section 115BBA
Up to Rs. 1 crore 25.17% 26%
More than Rs. 1 crore but up to Rs. 10 crore 25.17% 27.82%
More than Rs. 10 crore 25.17% 29.12%

Let us now understand the section by help of an example:-

ABC Ltd., was incorporated in year 2000-01, purchased a new plant and machinery of Rs. 10 lakhs on 01-04-2020. Its turnover for the previous year 2017-18 was less than Rs. 400 crore and, therefore, it would be chargeable to tax at the rate of 25% for the Assessment Year 2020- 21.

The total income of the company for Assessment Year 2021-22 before allowing for additional depreciation in respect of new plant and machinery is Rs. 20 lakh.

For the Assessment Year 2021-22, the company shall have only 2 options – opt for section 115BAA or pay tax as usual at the rate of 25%.

The total income of the company and tax thereon in both the cases shall be computed as follows:

ParticularsIf co. opts for Section 115BAAIf Co. doesn’t opt for Section 115BAA
Total Income before allowing additional depreciation20,00,00020,00,000
Less: Additional depreciation available as per section 32(1)(iia) [Rs.10 lakh * 20%] NA2,00,000
Total Income (a)20,00,00018,00,000
Applicable tax rate (b)22%25%
Tax on total income (c=a*b)4,40,0004,50,000
Add: Surcharge (d)44000Nil
Tax After Surcharge (e= c + d)4,84,0004,50,000
Add: 4% Health and education cess (f= e*4%) 19,36018,000
Total Tax liability (g= e + f)5,03,3604,68,000
Extra Tax payable under Section 115BAA35,360

If in above example, the company has not purchased any new plant and machinery during the year 2020-21 even in that case the amount of tax saving will not be much if company opts for section 115BAA 

ParticularsIf co. opts for Section 115BAAIf Co. doesn’t opt for Section 115BAA
Total Income (a)20,00,00020,00,000
Applicable Tax rate (b)22%25%
Tax on total income (c=a *b)4,40,0005,00,000
Add : Surcharge (d)44000Nil
Tax after surcharge (e= c+d)4,84,0005,00,000
Add : 4% Heath and education cess (f = e* 4 %)19,36020,000
Total Tax Liability (g= e+f)5,03,3605,20,000
Tax savings if co. opts 115BAA16,640

Can a company opt out of this section?

The domestic companies who do not wish to avail this concessional rate immediately can opt for the same after the expiry of their tax holiday period or exemptions/incentives as mentioned in point 2 earlier.

However, once such a company opts for the concessional tax rate under section 115BAA of the Income Tax Act,1961, it cannot be subsequently withdrawn.

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