Section 115BAA of Income Tax Act
The Government of India brought in multiple amendments to the Income Tax Act of 1961 through the Taxation (Amendment) Ordinance 2019. One such amendment was the introduction of Section 115 BAA.
Through Section 115BAA of the Income Tax Act, the government introduced a reduction in the corporate tax rate for domestic companies. In addition, the minimum alternate tax (MAT) rate was lowered to 15% from 18.5%.
Here’s a comprehensive rundown of Section 115BAA of the IT Act.
Section 115BAA: New Tax Rate for Domestic Companies
As mentioned, Section 115BAA of the Income Tax Act was introduced to provide the benefit of a lower corporate tax rate for Indian firms. It mentions that domestic companies can pay tax at a 22% rate along with a surcharge of 10% and cess of 4%.
These companies do not have to pay the minimum alternate tax if they choose to pay tax under Section 115BAA. This new tax rate was applicable from FY 2019-20.
Also read: Income Tax Slab And Rates 2021-2022
Conditions of Section 115BAA
According to the new tax regime, all domestic companies can pay income tax with a 22% tax rate (with applicable cess and surcharge). However, companies need to forego the following deductions under the Income Tax Act:
- Deductions under Section 10A for Special Economic Zones (SEZ)
- Additional depreciation under Section 32A and investment allowance for setting up industries (Section 32AD) in notified backward areas of West Bengal, Telangana, Bihar and Andhra Pradesh.
- Deductions that fall under section 33AB for rubber, tea and coffee.
- Deductions under Section 35 for expenditure for scientific research and research-specific expenses paid to any university.
- Capital expenditure of any specific business under section 35AD.
- Deductions under Section 35CCC and Section 35CCD for expenses incurred on agriculture extension projects or skill development programmes.
- All deductions under Chapter VI A, other than the sections of 80JJAA, 80 LA and 80M.
- Concessions for losses and unabsorbed depreciation under Section 72A.
Features of Section 115BAA
The features of Section 115 BAA of the Income Tax Act are provided below:
- Companies need to opt out of the Maximum Alternate Tax (MAT) system if they choose to be in Section 115BAA.
- The tax rate for domestic companies is 22%+ additional cess and surcharge.
- Companies can opt out of concessional tax and can return to the previous tax regime.
- This is an optional taxation system.
Eligibility Criteria for Section 115BAA
Domestic companies have the option to pay income tax under the new tax rates as introduced through Section 115BAA. However, they need to fulfil certain conditions for this. These conditions include the following:
- Those companies that seek to pay tax as per Section 115BAA should not ask for other incentives or exemptions under any other provisions of the IT Act. These companies have to compute their total incomes without claiming the following:
- Any deductions that are available for companies that have been established in special economic zones u/s 10AA
- Additional depreciation as in Section 32 and any investment allowance u/s 32AD for new plant or machinery in specific backward regions of states such as Bihar, Telangana, Andhra Pradesh and West Bengal
- Any deductions under Section 33AB for companies engaging in coffee, rubber or tea production
- Any kind of deductions as per Section 35AD for capital expenditure of specific businesses
- Deductions as per Section 35 for expenses towards scientific research or any amount provided to research institution, university, or IITs
- Deductions for deposits that any company associated with the extraction of fossil fuel makes to a site restoration fund as per Section 33ABA
- Any deductions as per Chapter VI-A on certain incomes, permissible under Section 80AC, 80IAC, 80IB, 80IA and others (Exceptions include deduction as per Section 80M and 80JJAA)
- Deductions or benefits under Section 35CCC for agricultural extension projects or for any skill development project u/s 35CCD
- Any set-off for losses carried forward or any depreciation from the previous years, if these losses happened with respect to deductions mentioned above
- Set-off of losses carried forward by an amalgamated company or any depreciation of an amalgamating company if such depreciation or losses take place with respect to the above-mentioned deductions
- Companies should not claim any set off for losses mentioned above if they opt for new tax rates under Section 115BAA.
- Domestic companies have to choose the option of taxation under Section 115BAA either on or before the last date of filing IT returns. This date is usually September 30 of a particular assessment year. Once a company chooses taxation under this section, it cannot be changed or withdrawn later on.
- There are no restrictions regarding the turnover of a domestic company.
- Both existing and new companies can opt for taxation under Section 115BAA.
New Effective Tax Rates Applicable to Domestic Companies
The new tax rate for domestic companies under Section 115BAA will be 25.168%. Here is a detailed breakup of the new tax rate under this section:
| Base Tax Rate | Applicable Surcharge | Cess | Effective Tax Rate |
| 22% | 10% | 4% | 22×1.1×1.04= 25.168% |
Companies opting for taxation as per tax rates of Section 115BAA do not have to pay the minimum alternate tax.
Also read: New Tax Regime Under Section 115 BAC
Comparison of Effective Tax Rate
| Total Income | Effective Tax Rate (inclusive of surcharge and cess) | Effective Tax Rate (inclusive of surcharge and cess) |
| Co. opts for section 115BBA | Co. doesn’t opt for section 115BBA | |
| Up to Rs. 1 crore | 25.17% | 26% |
| More than Rs. 1 crore but up to Rs. 10 crores | 25.17% | 27.82% |
| More than Rs. 10 crores | 25.17% | 29.12% |
Though the effective tax rate in case a company opts for section 115BAA is slightly lower, such companies will not be able to claim other tax benefits available under the Income-tax Act. If a company does not opt for section 115BBA can claim specified deductions, incentives, exemptions and additional depreciation available under the Income-tax Act.
Exemptions or Deductions not Available to Companies Opting for Sections 115BA, 115BAA or 115BAB
| Section 10AA | Special provision for units established in Special Economic Zones (SEZ) |
| Section 32(1)(ii-a) | Additional depreciation in respect of new plant and machinery |
| Section 32AD | Deduction for investment in new plants and machinery in notified backward areas |
| Section 33AB | Deduction in case of tea, coffee or rubber business |
| Section 33ABA | Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India |
| Section 35(1)(ii) | Deduction for donation made for scientific research to a university or other institutes which may or may not be related to business |
| Section 35(1)(iia) | Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business |
| Section 35(1)(iii) | Deduction for donations made to the university, college or other institutes for doing research in social science or statistical field |
| Section 35(2M) | Deduction for donation made to National Laboratory or IlTs, etc. for doing scientific research which may or may not be related to business |
| Section 35(2AB) | Deduction for capital expenditure (excluding the cost of land and building) on scientific research relating to business of biotechnology or manufacturing of any article or thing |
Final Word
Domestic companies looking to avail benefits of reduced tax rates under Section 115BAA of the Income Tax Act need to fulfil certain requirements to be eligible for such tax rates. Existing companies can easily migrate to tax rates under this section at any point in time. Choosing the new tax regime over the existing one, domestic companies won’t be able to take advantage of other tax benefits under the income tax act. Companies wishing to opt for Section 115BAA should fill out Form No. 10-IC and submit it online after logging into the e-filing portal.
FAQs
Ans: Yes, domestic companies who do not want to avail themselves of reduced tax rates under this section can choose to opt-out. However, they need to do it after the expiry of their tax holiday period. But, once a company opts for tax rates under this section, it cannot withdraw it subsequently.
Ans: Domestic companies that fulfil the above-mentioned eligibility criteria qualify for availing concessional tax rates u/s 115BAA. In other words, partnership firms, individuals, LLPs, foreign companies, BOI, and AOPs are not eligible to enjoy reduced tax rates under this section.
Ans: According to Rule 21AE of the Income Tax Act, a domestic company has to opt for Section 115BAA electronically. They can do so by providing details in Form 10-IC either with a digital signature or through electronic verification mode.
Ans: No, domestic companies choosing to pay tax at reduced rates under Section 115BAA cannot claim MAT credits for the tax they paid under MAT in the tax holiday period. Companies won’t be able to lower their tax liability through Section 115BAA if they claim MAT credits. CBDT will issue a clarification about MAT credit for companies that choose taxation u/s 115BAA.
Ans: No, even if a domestic company chooses to opt for taxation at concessional rates as per Section 115BAA, there would be no impact on capital gains tax. Similarly, there would be no impact on bringing forward losses under the ‘Capital Gains’ head.
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