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Section 115BAA of the Income Tax Act- A Comprehensive Overview

Updated: Oct 18

On September 20, 2019, the Government of India implemented Section 115BAA using the Taxation (Amendment) Ordinance 2019. The Income Tax Act of 1961 was amended in multiple ways by this ordinance. A reduction in the corporation tax rate for domestic businesses and manufacturing firms was among the announced changes. In addition, the MAT rate was lowered to 15% from its previous 18.5% level. In this article, we will discuss in detail about the reduction in the corporate tax rate for domestic business in India.

What is Section 115BAA of the Income Tax Act, 1961?

The Income Tax Act of 1961 underwent numerous revisions by the Indian government through the Taxation (Amendment) Ordinance 2019. To foster business expansion and increased global competitiveness, the government implemented a tax-efficient method for enterprises to disclose their revenue through Section 115BAA of the Income Tax Act. The Income Tax Act's Section 115BAA was enacted to cut the corporate tax rate for Indian businesses.

The modification has made it possible for domestic corporations to pay tax at a rate of 22% instead of the 30% regular corporate tax rate in India. This is in addition to a 10% surcharge and a 4% cess. As of FY 2019–2020, this new corporate tax structure is in effect. The main advantage of Section 115BAA is that it provides domestic businesses with a reduced tax rate, which can result in substantial tax savings. Domestic businesses were previously subject to a 30% tax rate; however, Section 115BAA has allowed them to choose a 22% tax rate instead. The goal of this tax rate reduction is to encourage investment and corporate expansion within the country, which will in turn promote economic growth.

Key Features of Section 115BAA

Corporate tax for Indian businesses is 22% plus a 10% surcharge and 4% cess.
As a result, the effective tax rate has changed from 30% to 25.17%.
A business is exempt from paying Minimum Alternate Tax (MAT) if it elects to pay taxes under Section 115BAA.
The minimum alternate tax rate was also reduced to 15% from 18.5% in the same legislation.
Businesses have the option to revert to the prior tax system and forego concessional tax.

Implications for Companies Opting for Section 115BAA

A business is not eligible for any further Income Tax Act deductions or exemptions after it has chosen to utilise section 115BAA. This implies that the business is not permitted to deduct expenses under sections 80C, 80D, and 80G. Only the deductions listed in section 115BAA itself are permitted. Furthermore, a business cannot revert to the prior tax structure once it has chosen section 115BAA. It shall continue to pay taxes for each and every assessment year after that at the reduced rate of 22%. It's also crucial to remember that businesses involved in the production or distribution of electricity are not eligible for section 115BAA. These businesses are still subject to the 30% tax rate as before.

Conditions for the Applicability of Section 115BAA

The new tax system allows all domestic businesses to pay income tax at a rate of 22% (plus any applicable cess and surcharge). Nonetheless, in accordance with the Income Tax Act, businesses must forfeit the following deductions:

Deductions for Special Economic Zones (SEZ) under Section 10A.
Extra depreciation under Section 32A and investment allowance (Section 32AD) for establishing industries in West Bengal, Telangana, Bihar, and Andhra Pradesh declared backward areas.
Deductions for rubber, tea, and coffee under Section 33AB.
Deductions under Section 35 for payments made to any university for expenses related to scientific research and research-specific expenditures.
Capital expenditures under Section 35AD for any particular firm.
Deductions for costs related to skill development or agriculture extension projects under Sections 35CCC and 35CCD.
Every deduction allowed under Chapter VI A, excluding the 80JJAA, 80 LA, and 80M sections
Section 72A concessions for losses and unabsorbed depreciation

Eligibility Criteria for Section 115BAA

If domestic businesses meet the requirements listed below, they may choose to pay income tax at the new tax rates brought about by Section 115BAA:

Under no circumstances may businesses that wish to pay taxes in accordance with Section 115BAA request additional benefits or exemptions from any other I-T Act provisions. These businesses must calculate their overall revenues without deducting the following:
1. Any allowable deductions for businesses founded in special economic zones under Section 10AA
2. Additional depreciation under Section 32 and any investment allowance under Section 32AD for new machinery or plant in some underdeveloped states including West Bengal, Telangana, Andhra Pradesh, Bihar, and Telangana
3. Any deduction under Section 33AB for businesses that produce coffee, rubber, or tea Any type of deduction under Section 35AD for capital expenditures of particular businesses
4. Deductions under Section 35 for costs associated with scientific research or any sum given to a research institute, university, or Indian Institutes of Technology
5. Deductions for contributions made to a site rehabilitation fund by any fossil fuel extraction business in accordance with Section 33ABA
6. Any deductions allowed under Sections 80AC, 80IAC, 80IB, 80IA, and others on specific incomes as per Chapter VI-A
7. Benefits or deductions under Section 35CCC for skill development initiatives or agricultural extension projects under Section 35CCD
8. Any set-off of losses carried forward by an amalgamated company or any depreciation of an amalgamating company, if such depreciation or losses occur with respect to the aforementioned deductions
9. Any set-off for losses carried forward or any depreciation from prior years, if these losses occurred with respect to the deductions mentioned above.
If companies choose to use Section 115BAA to implement new tax rates, they shall not claim any set-off for the losses indicated above.
Domestic businesses must decide whether to file their IT returns by the deadline or opt for taxation under Section 115BAA. Usually, on September 30 of that specific evaluation year, this date occurs. A company's decision to use this section for taxation cannot be later reversed or withdrawn.
There are no limitations on the turnover of a domestic company.
Companies, both new and old, may choose to be taxable under Section 115BAA.

Tax Rate for Domestic Companies under Section 115BAA

When the turnover or gross revenue for the previous year does not reach Rs. 400 crore- 25%
When the company opts for section 115BA- 25%
When the company opts for section 115BAA- 22%
When the company opts for section 115BAB- 15%
Other domestic companies- 30%

Under Section 115BAA, the new tax rate for domestic businesses will be 25.168%. A thorough analysis of the new tax rate is explained below:

Base Tax Rate= 22%

Applicable Surcharge= 10%

Cess= 4%

Effective Tax Rate= 22×1.1×1.04= 25.168%

Tax Rate Comparison With & Without Section 115BAA

Even while choosing Section 115BAA results in a somewhat lower effective tax rate, the corporation will lose out on other tax incentives provided by the Income-tax Act. A business may claim some deductions, incentives, exemptions, and additional depreciation allowed under the Income-tax Act if it chooses not to use Section 115BBA.

Conclusion

Domestic businesses must first meet several requirements to be eligible for the lower tax rates under Section 115BAA of the Income Tax Act. Companies that are already in operation can switch to this new tax structure at any moment with ease. Nevertheless, a business will not be eligible to benefit from additional tax advantages provided by the I-T Act if it decides to use the new tax system instead of the current one. Businesses that want to use Section 115BAA of the Income Tax Act should go to the e-filing portal, log in, and fill out Form No. 10-IC.

FAQ

Q1. What is the key objective of Section 115BAA of the Income Tax Act?

Section 115BAA's goal is to help domestic businesses by lowering their tax rates and promoting expansion and investment.

Q2. What is the benefit of opting for section 115BAA?

The reduced tax rate is the primary advantage of choosing Section115BAA, since it can enhance a business's cash flow and profitability. By removing the requirement for businesses to claim a variety of deductions and exemptions, it also streamlines the tax code.

Q3. What tax rate is applicable under Section 115BAA?

The applicable tax rate under Section 115BAA is 22%.

Q4. Who can opt for section 115BAA?

Domestic enterprises may choose to use section 115BAA if they have no income from sources other than their business operations, no accumulated losses or unabsorbed depreciation, and no income from units established in a Special Economic Zone on or after April 1, 2020.

Q5. Can a foreign company opt for Section 115BAA?

Foreign companies are not eligible to opt for the tax rates under Section 115BAA of the Income Tax Act.

Q6. Can a Domestic company opt out of Section 115BAA?

If domestic enterprises would like to take advantage of this concessional rate after their tax vacation period or exemptions/incentives expire, they can do so. But once such a corporation chooses to use the concessional tax rate under the Income Tax Act of 1961, section 115BAA, it cannot take that choice back.

Q7. What deductions and exemptions have to be foregone under Section 115BAA?

Certain deductions and exemptions under the Income Tax Act, such as those under Sections 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, and 35(1)(ii)/(iia)/(iii)/(iiia)/(iv)/(iva), will not be available to companies that choose to adopt the reduced tax rate under Section 115BAA.

Q8. What is the process for opting for Section 115BAA?

A domestic firm is required by Income Tax Act Rule 21AE to choose Section 115BAA electronically. They can accomplish this by supplying information on Form 10-IC using an electronic verification method or a digital signature.

Q9. Can companies switch back to the previous tax regime after opting for section 115BAA?

No, after choosing section 115BAA, businesses are unable to return to the prior tax system. They are required to continue paying taxes for all ensuing assessment years at the reduced rate of 22%.

Q10. Can companies with losses in the current year opt for section 115BAA?

Yes, businesses that have experienced losses in the current year are still eligible to utilise section 115BAA, provided that they have neither cumulative losses nor unabsorbed depreciation.

Q11. Is it mandatory for all domestic companies to file Form 10-IC?

No. You can choose not to do this. Only if a Domestic Company elects to pay tax at the concessional rate of 22% (exclusive of surcharge and cess) under Section 115BAA of the Income Tax Act, 1961, must Form 10-IC be completed.

Q12. Do I need to file Form 10-IC again for the next assessment year?

No, once you have selected concessional tax rates, you cannot remove them from future assessment years.

Q13. Can a domestic company utilise MAT credits after opting for Section 115BAA?

For taxes paid under MAT during the tax holiday period, domestic enterprises that choose to utilise section 115BAA will not be eligible to receive MAT credits. By claiming MAT credits, the corporations would not be able to lower their tax responsibilities under section 115BAA. If a business chooses to pay taxes under section 115BAA, the CBDT may provide clarity on MAT credits. When a domestic firm chooses to utilise section 115BAA, it also forfeits the right to deduct any brought forward depreciation, or additional depreciation, from its assessments in both the year the option was exercised and subsequent assessment years.

Q14. Can Section 115BAA impact capital gains tax?

The answer is no, capital gains tax would not be affected even if a domestic business chooses to use Section 115BAA's concessional tax rates. Similarly, carrying forward losses under the "Capital Gains" heading would not be affected.

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