Section 115BAB Lower Tax Rate on Domestic Companies

Section 115BAB – Lower Tax Rate on Certain New Domestic Manufacturing Companies

Section 115BAB – Lower Tax Rate on Certain New Domestic Manufacturing Companies: The Taxation Law Ordinance of 2019 introduced Section 115BAB on September 20th, which applies from the financial year of 2019 to 2020.

Lower Rate of Income Tax

This section gives new domestic manufacturing companies an option to pay income tax at a 15% rate (with additional Surcharge and cess) beginning from 2019 to 2020.

The domestic company can opt for a lower-income tax rate during any financial year (2019-20 or after that). However, once exercised, the option cannot be subsequently withdrawn and shall apply to all the subsequent financial years.

Note: Under Section 115BAB, a flat surcharge of 10% (irrespective of turnover) and 4% cess applies to the companies opting for lower tax rates. Including Surcharge and cess, the effective tax rate is 17.16%.

Eligibility Criteria for Section 115BAB Lower Tax Rate on Domestic Companies

Domestic manufacturing companies have a choice to pay a lower income tax rate of 15% (and additional Surcharge and cess), provided the following conditions are met:

  • The company has been registered on or after October 01st of 2019 and has commenced manufacturing on or before March 31st of 2023.
  • It is not formed by splitting or reconstructing the business already in existence, assuming that this condition does not apply to an undertaking that is established under section 33B (rehabilitation allowance)
  • The company does not use machines or plants previously used for any purpose, and machines or plants used outside India by anyone shall not be regarded as machines or plants previously used for any purpose if the conditions below are fulfilled.
  • Such machines or plant is imported into India from any country outside India. No deduction on depreciation concerning machines or plants is allowed under the Act’s provision to calculate the total incomes of an individual at any time before the date of installation of the machines or plant.
  • In the case of an individual, machines or plants, or parts previously used are used by the company. The total value of these machines or parts does not exceed 20% of the total value of the parts or plants, or apparatus used by the company. Then, the above condition specified shall be met.
  • The company does not use any building formerly used as a hotel or a convention center, as the case may be.
  • “Convention centre” is a building of a prescribed area consisting of convention halls that are to be used to hold seminars and conferences and have other facilities and amenities.
  • “Hotel” means a hotel rated from two-stars to a four-star category classified by the Central Government.

The company does not engage in business other than manufacturing or producing an article and researching the distribution of such items manufactured. Therefore, without giving any benefits or deductions, or exemptions, the company computes the total outcome. This criterion should be met for the Sections mentioned below:

  • Section 10AA of the Act relating to units formed in Special Economic Zones (SEZ).
  • According to the Act, Section 32(1)(iia) for additional depreciation allowance.
  • Section 32AD relating to deduction for investment in new plant and machine at notified backward areas in Bihar, Andhra Pradesh, Bihar, West Bengal, and Telangana.
  • Section 33AB in the Act for the development allowance of tea or coffee or rubber.
  • Section 33ABA according to the Act for site restoration, funds by companies engaged in the extraction of petroleum or natural gas production in India.
  • The Section 35(1) (ii), (iia), (iii) and Section 35(2AA), (2AB) as per the Act for expenditure on certain scientific research.
  • According to the Act, Section 35AD for deduction concerning expenditure on certain specified business.
  • Section 35CCC for expenditure on any agricultural extension projects according to the Act.
  • According to the Act the Section 35CCD for expenditure on the skill development project.
  • Part C of Chapter VIA, except for section 80JJAA as per the Act, focuses mainly on deductions on the employment of new employees.
  • Without any legal clauses set against the debtor or any loss carried forward from a year before, such loss is ascribable to any deductions mentioned above. However, it should have already been in effect, and no further deduction for such loss shall be allowed for any subsequent year.
  • By claiming depreciation under Section 32, apart from the clause of additional depreciation mentioned under Section 32(1)(iia) of the Act, domestic manufacturing companies have the right to claim depreciation under Section 32. Still, the benefits for additional depreciation will not be available.
  • The domestic manufacturing companies should exercise the option following the method stated, on or before the specified due date under Section 139(1), for furnishing the return of Income for any financial year, which is usually September 30th of the assessment year.
  • The provision of Section 115JB relating to MAT shall not apply to the domestic manufacturing companies that exercise the option mentioned under Section 115BAB. It should be clear that the tax credit of MAT, paid by the domestic manufacturing company, will not be available besides exercising such an option.

Note: There is no specified time limit for domestic manufacturing companies to opt for lower income tax rates according to Section 115BAB. Therefore, the companies can opt for the benefits of Section 115BAB once they settle all losses brought forward and MAT credit under the regular tax regime.

Transfer Pricing Provisions and Its Applicability

In close connections between companies and any other persons or any other reasons, the business between them is arranged so well that the company receives more than ordinary profits. The Assessing Officer can ignore these excess profits. The Assessing Officer shall take only the amount that can be reasonably deemed to have been derived from the business itself.

When the business transaction involves a specified domestic transaction referred to in section 92BA, the transaction’s profits will be determined about the transfer pricing.

The Comparative Effective Tax Rate for the Financial Year 2019 to 2020

Particulars and their details are stated low as for companies having an income lower than Rs. 1 crore from 2019 to 2020 (for Section 115BAB).

Particulars Opting for Not Opting for
Tax About 15% About 25%
Surcharges About 10% NA
For Educational Cess About 4% About 4%
Effective Tax Rate About 17.16% 26%

Particulars and their details are stated below for companies having an income of more than Rs. 1 crore (going up to Rs. 10 crores) during the financial year 2019 to 2020 (for Section 115BAB).

Particulars Opting for Not Opting for
Tax About 15% About 25%
Surcharges About 10% About 7%
For Educational Cess About 4% About 4%
Effective Tax Rate About 17.16% 27.82%

Particulars and their details for companies having an income of more than Rs. 10 crores from 2019 to 2020 (for Section 115BAB).

Particulars Opting for Not Opting for
Tax About 15% About 25%
Surcharges About 10% About 12%
For Educational Cess About 4% About 4%
Effective Tax Rate About 17.16% 29.12%

Please Note: MAT is also applicable at 15% on the companies which do not opt for Section 115BAB. Therefore, every corporate has to consider multiple factors before opting for Section 115BAB.

To conclude, the Government has reduced tax rates on corporate sectors that is a good way to boost the economy. The factors to consider are stated below:

  • Balance of losses.
  • The available MAT credit.
  • The current taxable Income & projected Income.
  • The current turnover & projected turnover.
  • Methods of investment in plant & machinery for additional depreciation.
  • MAT applicability
  • Cash flows
  • Exemptions unavailable under Section 115BAB.

Example: A domestic company’s total Income is 20 lakhs from 2019 to 2020. Their tax liability for Section 115BAB is stated below:

  • Total Income: when opting is 20,00,000 and when not opting is 20,00,000.
  • The tax Rate: when opting is 15% and when not opting is 25%.
  • The tax Amount: when opting is 3,00,000, and when not opting is 5,00,000.
  • Surcharge (10%): when opting is 30,000. When not opting is NA.
  • Tax After Surcharge: when opting is 3,30,000 and when not opting is 5,00,000.
  • 4% Cess: when opting is 13,200 and when not opting is 20,000.
  • Total Tax Liability: when opting is 3,43,200 and when not opting is 5,20,000.
  • Savings or Loss: when opting is 1,76,800 and when not opting is none.

In the example mentioned before, if it is assumed that the company has made an investment in machinery and plant of Rs. 50 lakhs at the time of the financial years 2019 to 2020 then the tax calculation will be like below.

Particulars Opting for 115BAB Not Opting for 115BAA
Tax Amount Rs. 3,00,000 Rs. 2,50,000
Surcharge of 10% Rs. 30,000 NA
Tax After Surcharges Rs. 3,00,000 Rs. 2,50,000
Tax Rate About 15% About 25%
Total Income Rs. 20,00,000 Rs. 20,00,000
Additional depreciation acc. to Section 32(1)(iia) at 20% Rs. 10,00,000
Total Income Rs. 20,00,000 Rs. 10,00,000
4% Cess Rs. 13,200 Rs. 10,000
Total Tax Liability Rs. 3,43,200 Rs. 2,60,000
Savings or Loss Rs. 83,200

The result will differ for every corporate, as stated in the example explained above. It’s a straightforward way through which an individual can opt for Section 115BAB at any time, but a way out of it after the confirmation does not exist.

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