Section 115BAA: New Tax Rate for Domestic Companies

Aimed at reducing the difficulty in availing the Minimum Alternative Tax (MAT) , the Government of India introduced Section 115BAA to revise the corporate tax rate on the domestic companies. Under this newly inserted section, domestic companies, meeting specific conditions, have an option to pay tax @ 22% from the financial year 2019-20 onwards.

1. A company opting for benefits under Section 115BAA don't have to pay the Minimum Alternate Tax (MAT). For the Financial year 2019-2020, MAT rates are 15% plus surcharge and cess.
2. A company can opt-out of the concessional tax under Section 115BAA and follow the old tax regime.
3. However, if the company exercises the option under Section 115BAA for a given assessment year, it cannot withdraw it for the same or subsequent assessment years.

1. The company must calculate total income without availing any exemptions or deductions. As a result, to compute its income, the company has to forego following deductions or concessions under the Income Tax Act:
2. Concessions for carrying forward loss or depreciation from earlier assessment years
3. Concessions for losses or allowances for unabsorbed depreciation under section 72A
4. The company must exercise the option to avail benefit under Section 115BAA on or before the due date for filing the return of income for the assessment year, which is usually 30th September.

In addition to paying tax @22% on the net taxable income, the companies will have to pay a surcharge of 10% and cess of 4%. Adding these factors, the total effective rate of tax on domestic companies works out to be 25.168% as tabulated below:

Although the new taxation law under Section 115BAA attracts lower tax rates, it would be wrong to jump to a conclusion based on effective tax rates alone. Since a domestic company will not be able to avail tax benefits under different sections of the Income Tax Act, it might have to pay extra tax while opting for concessional rates under Section 115BAA.While comparing the efficacy of the new tax regime over the existing one, one must account for the loss in revenue by forgoing tax benefits. If a company is already saving huge taxes due to deductions, incentives, concessions, etc., staying with the old scheme appears beneficial.

Through the Taxation (Amendment) Ordinance of 2019, the Indian Government amended the IT Act of 1961 in numerous ways. One of these changes was the addition of Section 115 BAA.For domestic businesses, the Indian government lowered the corporate tax rates by Section 115BAA of the IT Act. The minimal alternate tax rate was also decreased from 18.5% to 15%. As previously indicated, Section 115BAA of the Income Tax Act was created to give Indian businesses the advantage of a reduced corporation tax rate. It states that domestic businesses may pay tax at a rate of 22%, plus a surcharge as well as a cess of 10% as well as 4%, respectively.If these businesses opt to pay tax under Section 115BAA, they are not required to bear the minimum alternate tax. This latest tax rate was effective for the 2019–20 fiscal year.So, yes, under the new tax system , all domestic enterprises are eligible to pay income tax at a rate of 22%, plus any appropriate cess as well as a surcharge.

Domestic businesses have the choice to pay income tax at the new rates made possible by Section 115BAA. They must, however, meet specific requirements for this. The following are some of these circumstances:1) Firms who want to pay tax in accordance with Section 115BAA shouldn't request any additional incentives or exclusions under other provisions of the IT Act. These businesses must estimate their overall revenues without making the following claims:

• Any deductions permitted under Section 10AA for businesses founded in SEZ or special economic zones.
• For new equipment or machinery in certain underdeveloped areas of states like Bihar, Andhra Pradesh (AP), Telangana, as well as West Bengal (WB), additional loss as in Section 32 as well as any investment allowance under Section 32AD may be granted.
• Section 33AB deductions for businesses producing tea, coffee, or rubber.
• Deductions of any kind for capital expenses of particular firms under Section 35AD.
• Section 35 deductions for costs associated with conducting scientific research or for any sums given to research institutions, universities, or IITs.
• Deductions for contributions to a site restoration fund made by any business involved in the production of fossil fuels in accordance with Section 33ABA.
• Any deductions allowed under Sections 80AC, 80IAC, 80IB, 80IA, as well as others on certain types of income according to Chapter VI-A (Exclusions include deductions made in accordance with Sections 80M as well as 80JJAA.)
• Deductions or advantages under Section 35CCC for initiatives extending agricultural production or for any project enhancing skill development under Section 35CCD

2) If businesses choose the increased tax rates provided by Section 115BAA, they should not make any set-offs for the aforementioned losses.3) Domestic corporations must decide whether to be taxed under Section 115BAA on or prior to the deadline for filing IT returns . Typically, this day falls on the 30th of September of a given evaluation year. A corporation cannot later amend or withdraw its decision to be taxed in accordance with this clause.4) There are no limitations on a domestic company's turnover.5) Companies of any age may choose to be taxed under Section 115BAA.

Yes, domestic enterprises have the option to decline the reduced tax rates provided by this clause. However, they must do it after their tax vacation period has ended. However, once a firm chooses tax rates under this clause, it cannot change its mind afterwards.

No, if a domestic company chose to be taxed at lower rates in accordance with Section 115BAA, there would be no impact on capital gains tax. Losses under the "Capital Gains" section would also have no impact going ahead.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.