Section 115BAA – Lower Tax Rate on Domestic Companies

Section 115BAA – Lower Tax Rate on Domestic Companies

March 5, 2024 / Income Tax / By

Section 115BAA – Lower Tax Rate on Domestic Companies: The new section – that has been inserted in the Section 115BAA of the Income Tax Act,1961 to provide the benefit of a reduced corporate tax rate for the domestic companies. Domestic companies have the option to pay the surcharge of 10% and cess of 4%tax and pay the tax at a rate of 22% plus as stated under Section 115BAA. The Effective Tax rate is 25.17% from the Financial Year 2019-20 (AY 2020-21) onwards if domestic companies adhere to certain conditions specified. If The company opts for Section 115BAA, then they need not pay tax under MAT.

Section 115BAA – Lower Tax Rate on Domestic Companies Introduction

The introduction of Section 115BAA in the Taxation Law (Amendment) Ordinance 2019 on 20th September 2019, relevant from the FY- 2019-20.

Lower Income Tax Rate

This section grants an alternative only to domestic companies to pay income tax at the rate of 22% (plus applicable cess and surcharge) starting from the financial year 2019-20. The domestic company can choose a lower-income tax rate during any financial year (2019-20 or after that). However, the selected choice, once exercised, shall apply to all the subsequent financial years but can not be subsequently withdrawn.

Note: – Under Section 115BAA, the flat surcharge of 10% (irrespective of turnover) along with a 4% cess is relevant to the companies choosing a lower tax rate.

Section 115BAA – Lower Tax Rate on Domestic Companies Eligibility Criteria

Any domestic corporations and companies have a choice to pay a lower income tax rate of 22% (plus applicable cess and surcharge), provided the following requirements are complied with: –

  • The gross income of the company should be calculated without giving any exemptions/deductions/benefits.
  • The Special Economic Zones (SEZ) relating to units established in Section 10AA of the Act.
  • For additional depreciation allowance under Section 32(1)(iia) of the Act.
  • The deduction for investment in new plant and machinery in the notified backward area in the states of Andhra Pradesh, West Bengal, Bihar, and Telangana referred under Section 32AD of the Act.
  • For tea/ coffee/ rubber development allowance that comes under Section 33AB of the Act.
  • For site restoration fund by companies involved in the extraction of natural gas or petroleum production or both in India that comes under Section 33ABA of the Act.
  • For certain scientific research expenditure that comes under Section 35(1) (ii), (iia),(iii) and 35(2AA), (2AB)of the Act.
  • Deduction in respect of total capital expenditure on specified business that comes Section 35AD of the Act.
  • Expenditure on an agricultural extension project that comes under Section 35CCC of the Act.
  • Expenditure on the skill development project that comes under Section 35CCD of the Act.
  • Other than section 80JJAA of the Act, Part C of Chapter VIA(deduction in respect of employment of new employees).
  • Without set-off, any loss sustained forward from an earlier year to the extent that such loss is attributable to any of the deductions specified above in point (a). However, no further deduction for such loss shall be granted for any succeeding year, and it shall be deemed to have been already mentioned.
  • Under section 32(1)(iia), Other than clause additional depreciation of the Act, by claiming the depreciation, if any, determined in such manner as may be prescribed under section 32. In other words, under Section 32, domestic companies can claim depreciation, but benefits for additional depreciation shall not be available.
  • The choice should be operated by the domestic companies in a directed manner on or before the due date according to Section 139(1) for furnishing the return of income for any financial year as specified, i.e. usually 30th September of the assessment year.
  • Under Section 115BAA, the Provision of Section 115JB relating to MAT shall not be suitable for domestic companies that exercise the option. It is also elucidated that the tax credit of MAT paid by the domestic company shall not be an available consequence to exercising such an opportunity.

Note: – Under Section 115BAA, there is no time limit for the domestic company to opt for lower-income tax. So, according to Section 115BAA, the companies can opt for the benefit of once they set- all the brought forward losses and under the regular tax regime, the MAT credited.

Effective and Comparative Tax Rate for Financial Year 2019-20

  1. If the gross receipts or turnover of the company during the financial year 2017-18 Rs. 400 crore during financial year 2017-18 and during the financial year 2019-20, have income than Rs. 1 crore but upto Rs. 10 crore
    1. Tax Rate- Opt Section 115BAA- 22%, Doesn’t Opt Section- 115BAA-25%
    2. Surcharge- Opt Section 115BAA- 10%, Doesn’t Opt Section- 115BAA-7%
    3. Education Cess- Opt Section 115BAA- 4%, Doesn’t Opt Section- 115BAA-4%
    4. Effective Tax Rate- Opt Section 115BAA- 25.17%, Doesn’t Opt Section- 115BAA-27.82%
  2. If the gross receipts or turnover of the company during the financial year 2017-18 Rs. 400 crore during financial year 2017-18 and during the financial year 2019-20, have income more than Rs. 10 crore
    1. Tax Rate- Opt Section 115BAA- 22%, Doesn’t Opt Section- 115BAA-25%
    2. Surcharge- Opt Section 115BAA- 10%, Doesn’t Opt Section- 115BAA-12%
    3. Education Cess- Opt Section 115BAA- 4%, Doesn’t Opt Section- 115BAA-4%
    4. Effective Tax Rate – Opt Section 115BAA-25.17%, Doesn’t Opt Section- 115BAA-29.12%
  3. If the gross receipts or turnover of the company during the financial year 2017-18 Rs. 400 crore and during the financial year 2019-20, have income more than Rs. 1 crore but up to Rs. 10 crores.
    1. Tax Rate- Opt Section 115BAA- 22%, Doesn’t Opt Section- 115BAA- 30%
    2. Surcharge- Opt Section 115BAA- 10%, Doesn’t Opt Section- 115BAA- 7%
    3. Education Cess- Opt Section 115BAA- 4%, Doesn’t Opt Section- 115BAA-4%
    4. Effective Tax Rate- Opt Section 115BAA- 25.17%, Doesn’t Opt Section- 115BAA-33.38%
  4. If the gross receipts or turnover of the company during the financial year 2017-18 surpasses Rs. 400 crore and during financial year 2019-20, have income more than Rs. 10 crore
    1. Tax Rate- Opt Section 115BAA- 22%, Doesn’t Opt Section- 115BAA-30%
    2. Surcharge- Opt Section 115BAA- 10%, Doesn’t Opt Section- 115BAA-12%
    3. Education Cess- Opt Section 115BAA- 4%, Doesn’t Opt Section- 115BAA-4%
    4. Effective Tax Rate- Opt Section 115BAA-25.17%, Doesn’t Opt Section- 115BAA- 34%’
  5. If the gross receipts or turnover of the company during the financial year 2017-18 Rs. 400 crore and during the financial year 2019-20, have income more than Rs. 1 crore.
    1. Tax Rate- Opt Section 115BAA- 22%, Doesn’t Opt Section- 115BAA-30%
    2. Surcharge- Opt Section 115BAA- 10%, Doesn’t Opt Section- 115BAA-NA
    3. Education Cess- Opt Section 115BAA- 4%, Doesn’t Opt Section- 115BAA-4%
    4. Effective Tax Rate- Opt Section 115BAA-25.17%, Doesn’t Opt Section- 115BAA-31.20%
  6. If the gross receipts or turnover of the company during the financial year 2017-18 Rs. 400 crore and during the financial year 2019-20, have income more than Rs. 1 crore
    1. Tax Rate-Section 115BAA -22%, Doesn’t- Opt Section 115BAA-25%
    2. Surcharge- Section 115BAA -10%, Doesn’t- Opt Section 115BAA-NA
    3. Education Cess- Section 115BAA -4%, Doesn’t- Opt Section 115BAA-4%
    4. Effective Tax Rate – Section 115BAA -25.17%, Doesn’t- Opt Section 115BAA-26%

Note: – MAT is also applicable at a rate of 15% on the companies which do not opt for Section 115BAA.

Conclusion

A welcome move to boost the economy is introduced by the Government to reduce the tax rate on corporates. Whereas, on the other side, take our the various exemption\benefits available like supplementary depreciation etc. Every corporate has to acknowledge various factors before opting for Section 115BAA like: –

  • Available MAT credit
  • Current taxable income and projected income
  • Current turnover and projected turnover
  • Balance of brought forward losses
  • The pattern of investment in machinery and plant for additional depreciation
  • Cash flows
  • MAT applicability
  • Various exemptions not available under Section 115BAA

The end result of a corporation or company with a simple example. Assuming a domestic company during the financial year 2017-18, having the gross turnover less than Rs. 400 crore and during the financial year 2019-20 having a total income of Rs 20 lakh. Then their tax liability shall be as follow: –

  • Total Income- Opt Section 115BAA- 20,00,000, Doesn’t Opt Section- 115BAA-20,00,000
  • Tax Rate- Opt Section 115BAA- 22%, Doesn’t Opt Section- 115BAA-25%
  • Tax Amount- Opt Section 115BAA- 4,40,000, Doesn’t Opt Section- 115BAA-5,00,000
  • Add: Surcharge (10%)- Opt Section 115BAA- 44,000, Doesn’t Opt Section- 115BAA-NA
  • Tax After Surcharge- Opt Section 115BAA- 4,84,000, Doesn’t Opt Section- 115BAA-5,00,000
  • Add: 4% Cess 19,360 20,000
  • Total Tax Liability- Opt Section 115BAA- 5,03,360, Doesn’t Opt Section- 115BAA-5,20,000
  • Saving/Loss- Opt Section 115BAA- 16,640, Doesn’t Opt Section- 115BAA- N\A

In the above example, during the financial year 2018-19, if we assume that the company invested in machinery and plant of Rs. 10 lakh, then the tax calculation will be as follows: –

  • Total Income- Opt Section 115BAA-20,00,000, Doesn’t Opt Section- 115BAA- 20,00,000
  •  Under section 32(1)(iia) Less: Additional depreciation @ 20%- Opt Section 115BAA- –, Doesn’t Opt Section- 115BAA-2,00,000
  • Total Income- Opt Section 115BAA- 20,00,000, Doesn’t Opt Section- 115BAA-18,00,000
  • Tax Rate- Opt Section 115BAA-22%, Doesn’t Opt Section- 115BAA-25%
  • Tax Amount- Opt Section 115BAA- 4,40,000, Doesn’t Opt Section- 115BAA-4,50,000
  • Add: Surcharge (10%)- Opt Section 115BAA-44,000, Doesn’t Opt Section- 115BAA-N\A
  • Tax After Surcharge- Opt Section 115BAA- 4,84,000, Doesn’t Opt Section- 115BAA-4,50,000
  • Add: 4% Cess 19,360 18,000
  • Total Tax Liability- Opt Section 115BAA-5,03,360, Doesn’t Opt Section- 115BAA- 4,68,000
  • Saving/Loss- Opt Section 115BAA- (35,360), Doesn’t Opt Section- 115BAA- N\A

In the above example, the end result will be different for each and every corporate, as you can see. It’s a one-way road, one can opt for Section 115BAA any time, but there is no way to opt out.

Leave a Comment

Your email address will not be published. Required fields are marked *