Section 115BAA – Income Tax Regulations
Section 115BAA – Income Tax Regulations
To reduce the difficulty in availing Minimum Alternative Tax, Government of India (GoI) introduced Section 115BAA in taxation laws for both existing and newly formed companies on or after October 1, 2019. This section would allow companies to regularise and avail the ‘excess’ tax leading to regular tax liability. Section 115 BAA describes the corporate tax rate released on September 20 2019, under the Income Tax Act, 1961.
Features of the Section 115BAA
The salient features of new section 115BAA are as follows:
- In order to support growth and investment, a new section 115BAA has been inserted by the Ordinance in the Income Tax Act with effect from the year 2019-2020.
- Section 115BAA allows any domestic company to pay income-tax at the rate of 22% for those who have not availed any exemption or incentive.
- The effective tax rate for the companies will be at the rate of 25.17%, which is inclusive of surcharge and cess.
- Also, the companies which avail for section 115BAA are not required to pay Minimum Alternate Tax (MAT).
- Any companies which do not opt for the concessional tax and avails the tax exemption should pay tax at the pre-amended rate. Therefore, such companies can opt for the concessional tax after the expiry of their tax holiday. Further, to provide relief to companies which remain to avail exemption, the rate of Minimum Alternate Tax (MAT) has been revised from 18.5% to 15%.
- The company should have been established on or after 1st October 2019
- The company must not have been formed by splitting up or established on a business that exists already
- The company must not use plant or machinery but can be supported to the extent of 20% for manufacturing purposes
- The company should not be operating on a used hotel or a convention centre building
Concession Tax Rate by Ministry of Finance
Ministry of Finance (MoF) lowered the corporate tax at the rate from 30% to 25.17% for domestic companies formed on or after October 1, 2019. The MoF also announced that the corporates can avail tax at the rate of 22% but will not be eligible to avail any incentive or exemption. The new tax rate was introduced through Section 115BAA, focusing on boosting startups with a lower corporate tax rate.
The following are the sections corporates will not be able to avail incentives on choosing the 22% tax rate:
- Section 32(1)(ii), 32AD
- Sections 33AB, 33ABA
- Section 35(2AB), 35AD, 35CCC, 35CCD
- Section 10AA and
- Under Chapter VI A (except 80JJAA)
Minimum Alternative Tax
To lead with modern technology and innovation, many companies have invested in research, capital investments, creating employment opportunities and business sector. Government of India (GoI) has allowed these companies to be exempted from higher tax slabs to improve, renovate and excel for the benefit of the country. The exemptions and incentives for these organisations required regulations, tax liability and specific provisions to decide the limit of deductions.
Hence GoI introduced Minimum Alternative Tax (MAT) on Limited Limited Partnerships (LLPs) and other companies that have a gross income of more than two million. The implementation of the MAT shall eliminate the companies of having a structure of paying less tax or no tax at all, leading to a regularised and increased tax system in India.
The important aspect of MAT is that the income shall be analysed by a computer program, where the companies shall be liable to pay 30 per cent of the income. Later, MAT credit system was introduced where the companies can carry forward the tax to next year as a credit to increase the innovation or manufacturing sector.
Impact of Section 115BAA
- Any domestic company opting for a 22% tax rate against the tax rate of 25% and 30% will not be able to benefit from MAT. The new tax rate can be implemented for the FY 2020-21
- As per Section 115BAA, the tax rate will be executed at a rate of 25.168%, including the surcharge of 10% and 4% cess.
- The benefit of availing the lower tax rate shall apply only to domestic companies. It does not apply to LLPs, partnership firm, foreign companies etc.
- Companies choosing the option under Chapter VIA (Part C) can choose not to avail the benefits, in case the companies decide to opt incentives, deductions or exemptions. However, the companies can opt for the lower tax rate under Section 115BAA when the incentives, deductions or exemptions are no longer required.
- Section 115BAA allows forward losses and unabsorbed depreciation under u/s 32(2). However, the section does not allow forward losses attributing to specific incentives, deductions or exemptions.
- A surcharge of 10% shall apply to the total income received
- The assessing officer shall determine the profits under Section 801A(10) sub-section (4) of Section 115BAB
- Companies opted for Section 115BAB cannot withdraw the option
Reduced tax using Section 115JB
MAT has been reduced from 18.5% to 15% with effect from FY 2020-21 under Section 115JB.
Companies that avail the lower tax benefit will be excluded from the profit of MAT
Though the regulations stipulate not to avail benefits, Section 115 does not restrict claiming MAT credit
The claim can be analysed through Section 115JAA(4), where the tax credit shall be calculated between the total income and total tax payable under Section 115JB and Section 115BAA.
Comparison of Section 115BAA with regular concessional tax rates
The Comparison between Section 115BAA with regular concessional tax rates for small and medium-sized new domestic manufacturing company are tabulated below:
|S.No||Quantum of the total income of the small and medium-sized company||When it is advisable to avail section 115BAA||When it is advisable to avail exemptions and concessional tax rates of 26% or 27.82% or 29.12% (inclusive of surcharge and cess)|
|1.||Total income not more than Rs. 1 crore||It can be availed when adjustments to total income in terms of section 115BAA not exceeding 3.3% of total income.||It can be availed when total income in terms of section 115BAB exceeding 3.3% of total income.|
|2.||Total income more than Rs. 1 crore but not exceeding Rs. 10 crore||It can be availed when adjustments to total income in terms of section 115BAA not exceeding 10.53% of total income.||
It can be availed when adjustments to total income in terms of section 115BAA exceeding 10.53% of total income.
|3.||Total income more than Rs. 1 crore||It can be availed when adjustments to total income in terms of section 115BAA not exceeding 15.69% of total income.||
It can be availed when adjustments to total income in terms of section 115BAA exceeding 15.69% of total income.
Set-off of Brought Forward Loss
In the case of a company availing for a lower tax rate of 22% under the section, 115BAA does not deny set-off of loss that is brought forward in computing its total income.
Section 115BAA(1) provides that the total income should be computed without claiming set-off of any loss carried forward from any previous assessment year. The above explanation can be illustrated with the illustrated with an example:
Suppose an existing company’s income is Rs. 10 crores after making adjustments for deductions. Its brought forward loss is Rs. 10 crore and Rs. 6 crore is attributable to investment-linked deduction under section 35AD. If the company opts for section 115BAA, then it cannot set off Rs. 6 crore loss which is attributable to deductions specified as per the section 115BAA. The balance loss of Rs.4 crore can be set off by computing income for section 115BAA. Company will pay tax at the rate of 25.17% on total income of Rs. 6 crores computed are as follows:
|1.||Total income after adjustments required by section 115BAA(1)||Rs. 10 crores|
|2.||Brought forward loss not attributable to deduction||Rs. 4 crores|
|3.||Total income for section 115BAA||Rs. 6 crores|
|4.||Tax (including of surcharge & cess) under section 115BAA at the rate of 25.17% of Rs. 6 crores.||Rs. 1.51 crores|
Note: Check PDF for detailed information about the notificationCircular_29_2019