Monday, July 13, 2020

Lower Corporate Tax Rate - Section 115BAA

Section 115BAA has been introduced in the Income Tax Act, 1961 to give the benefit of a reduced corporate tax rate for the domestic companies. With effect from Financial Year 2019-20, i.e. AY 2020-21, domestic companies would have the option to pay tax at a rate of 22% (plus surcharge plus cess) if they satisfy the following conditions.

Effective Rate of Tax: 22% + 10% Surcharge + 4% Cess = 22*1.1*1.04 = 25.168%

No Additional Depreciation: Additional Depreciation [Sec 32(1)(iia)] would not be allowable if a company chooses for the lower tax rate. Further, they shall not be allowed to claim set-off of any brought forward depreciation (due to additional depreciation) for the assessment year in which the option has been exercised and future assessment years.

No MAT Applicability: Such companies will not be required to pay minimum alternate tax (MAT) under section 115JB. Further, such companies will not be able to claim MAT credits for taxes paid under MAT during this period.

Domestic companies opting to pay tax under Section 115BAA cannot set off their loss incurred on account of Additional Depreciation and MAT credits specified under Section 115JAA. Therefore, it is advisable for these companies to first exhaust the loss and credit available. The option for lower tax rate can be availed from the following assessment year.

Other Exemptions/Deductions Not Allowed: The total income of such company shall be computed without exemption/incentives provided in the following sections:

- Scientific Research expense related deduction [Sec 35]
- Deduction especially available for units established in SEZ [Sec 10AA]
- Deduction for the Capital Expenditure incurred by any Specified Business [Sec 35AD]
- Deduction for expenditure incurred on an Agriculture Extension Project or on Skill Development Project [Sec 35CCC or 35CCD]
- Deduction for tea, coffee and rubber manufacturing companies [Sec 33AB]
- Deduction towards deposits made towards site restoration fund by companies engaged in extraction or production of petroleum or natural gas or both in India [Sec 33ABA]
- Investment Allowance towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal [Sec 32AD]
- Deduction under chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
- Set-off of any loss carried forward from earlier years, if such losses were incurred in respect of the aforementioned deductions

Opt-in Due Date: Such companies will have to exercise this option to be taxed under the section 115BAA on or before the due date of filing income tax returns i.e usually 30th September of the assessment year, which would be the extended due date for AY 2020-21 due to the Corona-virus pandemic. Once the company opts for such rate in a particular financial year, it cannot be withdrawn subsequently.

Form 10-IC:  The companies that are filing tax u/s 115BAA of the Income Tax Act are eligible to file Form 10-IC for adopting the new corporate tax rate.

The Form 10-IC requires submission of information such as name, PAN, registered address, date of incorporation and nature of business. A declaration is also given stating that the option once exercised shall not be withdrawn. The form is submitted using a digital signature or EVC validation.

Companies willing to adopt the new tax rates must file the forms with accurate information electronically before the due date for filing the ITR arrives (i.e. 30 September 2020 or extended date for the year).