written by Khatabook | November 23, 2021

Section 115BAA of the Income Tax Act – New Tax Rates for domestic companies

Section 115 BAA was brought into existence by the Central Government. This section was established through an ordinance in 2019, which was known as the Taxation Amendment Ordinance. The provision came into effect on September 20, 2019, to provide businesses with the benefits of a lower income tax rate for companies. Th e objective of introducing this section was to reduce the tax rates on corporations and provide them with the benefits of ease of doing business under the Government of India scheme. This ordinance makes specific changes to the Income Tax Act of 1961. This article contains a detailed descripti on of Section 115BAA of the Income Tax Act containing the reason behind bringing this into existence along with its related information.  

What are the changes in the Income Tax Act?

Some of the changes in the Income Tax Act which took place in 2019 are as follows:

  1. Decrease in Minimum Alternate Tax or MAT Rate from 18.5 % to 15%
  2. Introduction of the special tax rate in Section 115BAA of Income Tax Act for domestic companies at 22% instead of  30% of profits.

The new Section 115BAA of Income Tax Act gives the option to domestic companies to pay tax at 25.17 % (22 % tax + 10% surcharge on tax + 4% Health & Education Cess) effectively. However, this option will be available only if the domestic companies meet the required conditions specified in the article below. Also, if the company adopts Section 115 BAA, there will be no requirement to pay Minimum Alternate Tax (MAT).

When can you choose Section 115BAA of Income Tax Act?

The option to choose Section 115BAA of Income Tax Act for domestic companies was started in Assessment Year 2020-21. After this, the choice can be exercised for any subsequent assessment year. Since Section 115 BAA is optional, the company has to choose it by filing Form 10-IC.

A company can apply for the option in any assessment year as there is no time limit for choosing the option under Section 115BAA of Income Tax Act. The option can be availed at any time. However, once you start using this option, it is mandatory to use it in the subsequent assessment years since it cannot be changed afterwards.

Also, if the company fails to comply with the conditions specified in the section, this optional scheme would be invalid for the current and following Assessment Years. The company would no longer be eligible to use the option.

How can you exercise Section 115BAA of Income Tax Act?

The companies can exercise the option under Section 115BAA of Income Tax Act as per Rule No. 21AE of the Income Tax Rules 1962. For opting for Section 115 BAA, the companies have to file Form 10-IC of the Income Tax Act. The form contains the choice to be made and needs to be submitted online through an electronic verification code or the digital signature certificate. Certain details are also required to be furnished in the form given below in the article.

The form mentioned above must be filed on or before the due date for filing an income tax return under section 139(1) of the Internal Revenue Code of 1962. (For domestic firms subject to Transfer Pricing rules, the deadline is November 30th; for other domestic companies, the deadline is October 31st).

All domestic corporations have the option of paying income tax at a rate of 22% if the conditions given below are met.

Requirements for opting Section 115BAA of Income Tax Act

To claim Section 115 BAA, certain conditions are required to be fulfilled by the companies. Companies who opt for Section 115BAA of the Income Tax Act should not take advantage of any income tax exemptions. The total income of the company should be calculated without considering the following:

  • Section 32AD- Additional Depreciation and Investment Allowance to purchase new plant & machinery in backward areas of West Bengal, Bihar, Andhra Pradesh, Telangana.
  • Section 10AA- Deductions for the benefits of units situated in the Special Economic Zones.
  • Section 33AB- Deductions available to manufacturing business of tea, coffee, and rubber.
  • Section 35- Deduction for scientific research expenses of a University, IIT, National Laboratory, research association, etc.
  • Section 33ABA- Deduction for the payment of deposits to the site rehabilitation fund for the companies involved in the extraction or the production of petroleum, natural gas, or both in India
  • Section 35AD- Deduction for capital expenditures
  • Section 35CCC- Deduction for the expenses incurred on the agriculture extension project
  • Section 35CCD- Deduction for the expenses incurred on a skill development project
  • Chapter VI-A Deductions- Deductions for certain income under the following sections - sections 80IA, 80IAB, 80IAC, 80IB, and so on. There are a few exceptions as well, such as the exception section 80JJAA and 80M.
  • Claim a set-off of any loss carried forward or depreciation from prior years if such losses were incurred in relation to the deductions mentioned above.
  • Once the company opts for Section 115 BAA, it cannot claim set-off of loss anymore.

Domestic companies can exercise the option under Section 115BAA of Income Tax Act by filing Form No. 10-IC electronically through the digital signature certificate or the electronic verification code. The said form needs to be filed before the due date of filing of Income Tax Return under Section 139 of the Income Tax Act. The due date will be 30th November for companies on which Transfer Pricing applies and 31st October in the case of other domestic companies. A company's decision to use section 115BAA in a specific fiscal year cannot be reversed later.

There are no turnover restrictions, and the firm does not have to be new; any current company can move into this area at any time.

Also Read: Deductions under Section 80: Section 80C, 80CCC, 80CCD & 80D Income Tax

What is the income tax rate for companies under section 115BAA?

The increased effective tax rate of 25.168% will apply to domestic firms using Section 115BAA of Income Tax Act. The following is a breakdown of the reduced tax rate under Section 115BAA:

Basic Tax Rate

Surcharge on Tax

Health & Education Cess

Final Effective Tax Rate

22%

10%

4%

25.168%

Is MAT Applicable to the companies using the option under Section 115BAA of the Income Tax Act?

No, the companies which have opted for the option under Section 115BAA of the Income Tax Act are not required to pay Minimum Alternate Tax (MAT).

Is it possible for a taxpayer to use MAT credits if the section 115BAA option is used?

If the companies have opted for a reduced tax rate under Section 115BAA of Income Tax Act, then the companies cannot take the benefit of MAT Credit brought forward from the MAT paid during the previous years. The companies will not be allowed to reduce their tax burden by using MAT Credit.

Carry forward of Losses and Unabsorbed Depreciation

  • For Section 115BAA of Income Tax Act, the carried forward losses and unabsorbed depreciation are adjusted.
  • The brought forward depreciation will not be allowed if the Company opts for a lower tax rate under Section 115BAA of Income Tax Act.

Deadline to opt for 115BAA of the Income Tax Act

Section 115 BAA gives domestic businesses no deadline to choose a lower tax rate. As a result, after claiming the brought-forward loss on account of additional depreciation and, if applicable, applying for the MAT credit against the usual tax payable, such firms can take advantage of section 115 BAA. However, a domestic company cannot eliminate the choice after implementing the reduced tax rate under Section 115BAA of Income Tax Act of 1961.

Information to be furnished in Form 10IC of Income Tax to opt for Section 115BAA of Income Tax Act

For opting Section 115 BAA of Income Tax Act, the companies have to file Form 10 IC of the Income Tax Act. The form contains the choice to be made and needs to be submitted online through an electronic verification code or the digital signature certificate. The following information has to be furnished in Form 10 IC for claiming the benefit of Section 115 BAA:-

  1. Name of the company
  2. Whether the company is a domestic company – Yes / No
  3. Registered Address of the company
  4. Nature of Business Activities carried out by the company
  5. Date of Incorporation of the company
  6. PAN of the company
  7. Whether any unit of the company is situated in the International Financial Services Centre (IFSC) – Yes / No
  8. If the answer to above is Yes, mention the details about Unit:-
  • Name of the unit
  • Nature of Activities undertaken at the unit
  • The Address of the unit 

      9. Whether option under 115BA(4) has been exercised in Form 10 IB – Yes / No

     10. Self Declaration by the Principal Officer of the company.

Also Read: Section 44AD of Income Tax- Features & Applications

Conclusion

This article contains the objective of introducing Section 115BAA of the Income Tax Act, conditions to opt for the section and benefits that can be available under this section. Implementation of this section can aid in the reduction of the tax rates for various domestic companies. The applicability on various assessee’s forms through which application is to be made, manner of claiming the benefit, provisions of MAT, the effective rate of tax has also been discussed in this article. Therefore, we hope your queries regarding Section 115BAA of the Income Tax Act have been cleared.  

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FAQs

Q: Which types of assesses can claim the benefit of Section 115BAA?

Ans:

Domestic and Manufacturing Companies can claim the benefit of Section 115BAA.

Q: Is there any restriction on set-off of current year losses or carry forward of losses?

Ans:

There is no restriction on the set-off of current-year or carried-forward losses against income calculated under section 115BAA.The main restriction is that under the concessional tax regime u/s 115BAA, losses relating to restricted deductions are not allowed to be set off.

Q: Is it possible for a taxpayer to use MAT credits if the section 115BAA option is used?

Ans:

No, a taxpayer can't use MAT credits if the section 115BAA option is used.

Q: Whether the provisions of MAT are applicable in case the company opts for Section 115BAA?

Ans:

No, the provisions of Minimum Alternate Tax, i.e. MAT, are not applicable if the company opts for Section 115BAA. 

Q: Which form is used for claiming the benefit of Section 115BAA and when it is to be filed?

Ans:

Domestic companies can exercise the option under Section 115BAA by filing Form No. 10-IC electronically through the digital signature certificate or the electronic verification code. The said form needs to be filed before the due date of filing of Income Tax Return under Section 139 of the Income Tax Act. The due date will be 30th November for companies on which Transfer Pricing applies and 31st October in the case of other domestic companies.

Q: Is there any time limit for the domestic companies to opt for section 115BAA?

Ans:

Domestic companies can opt for Section 115BAA whenever they want.

Q: What is the effective income tax rate for companies under Section 115BAA?

Ans:

The effective income tax rate for companies under section 115BAA is 25.168 %, comprising 22% tax plus surcharge 10% plus Health and Education Cess 4%.

Q: From which Assessment Year is Section 115BAA of the Income Tax Act applicable?

Ans:

Section 115BAA is applicable from AY 2020-21

Q: When was Section 115BAA introduced?

Ans:

Section 115BAA was introduced on 20/09/2019 through Taxation (Amendment) Ordinance 2019

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