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.

Key Features

  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.

Eligibility Conditions

  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:
    • Deduction under Section 10AA which is available for companies in Special Economic Zones (SEZ)
    • Deductions while claiming depreciation under Section 32 and 32AD Deductions under Section 33AB and 33ABA for companies involved in manufacturing or production of tea, coffee, rubber, petroleum products, and natural gas.
    • Deductions under Section 35 and sub-sections 35AD, 35CCC, and 35CCD for scientific research, skill development, etc
    • All deductions listed under Chapter VI A of the Income Tax Act, except Section 80JJAA
  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. 

Taxation Rates under Section 115BAA

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:

  1. i
Income Tax rate applicable under Section 115BAA 22%
  1. ii
Surcharge on total income (@10%) (22*0.1) = 2.2%
  1. iii
Health & Education Cess on A+B above (@4%) {(22+2.2)*0.04} = 0.968%
  1. iv
Total Effective Tax rate (A+B+C) 25.168%


New Tax-Regime vs. Old Regime

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.

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DISCLAIMER

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.



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