Section 115BAB

Section 115BAB – Income Tax Regulations

Section 115BAB – Income Tax Regulations

The Ministry of Finance (MoF) introduced taxation laws, Section 115BAA and Section 115BAB for domestic and domestic manufacturing companies, registered on or after October 1st 2019 or commencing before 31 st March 2023. The sections were introduced to support the startups by reducing corporate tax for domestic and manufacturing companies. Section 115BAB was introduced under the Income-tax Act, 1961.

Section 115BAB

Section 115BAB was introduced by the MoF to provide an option for the domestic manufacturing companies to pay taxes at 15%. Companies choosing for concessional tax will no longer be eligible for deductions or incentives from the government. However, the MoF provides an option to choose to opt to file taxes with or without the concessional tax, for companies eligible to avail the benefits of Section 115BAB.

Introducing Section 115BAB will help to increase economic activity and employment opportunities. It will also provide support to increase liquidity, investment and production. Thus creating an increased profit and disposable income for the stakeholders leading to demand and consumption.

Features of the Section 115BAB

The salient features of Section 115BAB are as follows:

  • In order to attract investment in manufacturing and to boost “Make in India” initiative of the Government, new provision section 115BAB has been inserted by the Ordinance in the Income Tax Act with effect from the financial year 2019-2020.
  • Under this Section 115BAB, any domestic company incorporated on or before after 1st October 2019, making an investment in manufacturing has an option to pay income-tax at the rate of 15%.
  • The benefits under this Section II5BAB are applicable to the companies which do not avail any exemption or incentive and commences their production before or on 31st March 2023.
  • The effective tax rate for the companies will be at the rate of 17.16%, which is inclusive of surcharge and cess.
  • The surcharge at the rate of 10% is available irrespective of the amount of total income.
  • Also, such companies are not required to pay Minimum Alternate Tax (MAT).

Eligibility

Companies should have been registered to form on or after 1st October 2019 or registered to initiate production by 31st March 2023. The company can opt for Section 115BAB and file within 30th September of every assessment year.

The company should be a domestic manufacturing company, and the total income should be computed without any deductions under the following sections:

  •  Section 10AA
  •  Section 32 of sub-section (1) of clause (iia)
  •  Section 32AD
  •  Section 33AB
  •  Section 33ABA
  •  Section 2AA of sub-section (1) od sub-clause (ii, iia or iii)
  •  Section 35 sub-section (2AB)
  •  Section 35
  •  Section 35 AD
  •  Section 35CCC
  •  Section 35CCD or
  •  Provisions under Chapter VI-A, heading C: Section 8 OJJAA, Section 80IA, Section 80IAB, Section 80IAC or Section 80 IB

Section 80-ID: The property of the company should have been established in office space and not on a hotel or convention centre. (clause (a) and (b) of sub-section (6))

Section 33B: The company should not have been formed on a business that exists already or by split up

Machinery: The machinery used by the company should not have been used previously by other companies. However, the company can use used machinery that was used outside India or machinery that was not used in India by other companies. (sub-clause (ii))

If the company opts to use its old machinery, the total value of the machinery should not exceed 20% of the total value of the plant and machinery

Loss Carried Forward: As per sub-clause (ii) of clause (c) of sub-section (2), the carryover loss projected by the company for the previous year shall not be taken into account for any subsequent year.

MAT: The provision for documenting MAT will be not applicable

Benefits

Any new manufacturing company initiated after October 1st 2019 can avail the benefits of Section 115BAB

Tax can be filed at 15%

MoF provides transfer pricing provisions, when, the company has earned more the usual profits, the assessing officer shall consider only the regular profit for documentation of profits.

Section 92BA shall be applicable, and the profits will be calculated depending on the price set for the trade.

The total tax liability for the domestic manufacturing companies shall be followed as:

S. No.TypePer cent
1Basic Tax Rate15%
2Surcharge10%
3Cess4%
4MATNA
5Total (15*1.1*1.04)17.16%

Click here to avail benefits of Section 115BAB

Comparison of Section 115BAB with regular concessional tax rates

The Comparison between Section 115BAB with regular concessional tax rates for small and medium-sized new domestic manufacturing company are tabulated below:

S.NoQuantum of the total income of new domestic manufacturing small and medium-sized companyWhen advisable to avail Section 115BABWhen advisable to avail exemptions and regular concessional tax rates of 26% or 27.82% or 29.12% (including surcharge and cess)
1.Total income not exceeding Rs. 1 croreIt can be availed when adjustments to normal total income in terms of Section 115BAB does not exceed 51.51% of normal total income.It can be availed when adjustments to normal total income in terms of Section 115BAB exceeds 51.51% of normal total income.
2.Total income exceeds Rs. 1 crore but does not exceeds Rs. 10 croreIt can be availed when adjustments to normal total income in terms of Section 115BAB does not exceed 62.12% of normal total income.It can be availed when adjustments to normal total income in terms of Section 115BAB exceeds 62.12% of normal total income.
3.Total income exceeds Rs. 1 crore.It can be availed when adjustments to normal total income in terms of Section 115BAB does not exceed 69.69% of normal total income.It can be availed when adjustments to normal total income in terms of Section 115BAB does not exceed 69.69% of normal total income.

How to avail Section 115BAB?

The companies opting for Section 115BAB has to make an application in the prescribed manner and within the specified time for furnishing the first return of total income. However, a company cannot opt-in and opt-out from SEction 115BAB from year to year, depending on its total income computation.

Note: The detailed procedure for application under Section 115BAB is yet to be prescribed and the rules and forms yet to be notified for this purpose.

Section 115BAB under the Transfer Pricing

In case of business transacted between the assessee and any other person produces more profits to the company than the ordinary profits in such case the Assessing Officer (AO) will compute the reasonable profits and gains derived from the business.

In the case of the specified domestic transaction referred under Section 92BA, the amount of profits should be determined with respect to transfer pricing provisions as section 92F. The consequential amendments have been made to the specified domestic transaction in section 92BA.

As per the amendment of specified domestic transaction in section 92BA, in case of an assessee means any of the following transactions but not being an international transaction, namely:

  • Any transaction made under section 80A
  • Any transfer of goods or services under section 80-IA.
  • Any business transacted between the assessee and another person under section 80-IA.
  • Any transaction related to any other section under Chapter VI-A of Section 80-IA.
  • Any business transacted between the persons under section 115BAB
  • Any other transaction as specified from time to time.

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Peter is a Senior Content Writer and Copy Editor in Finance specializing in GST and Import & Export. He has also written articles on Medical, Philosophy, and Literature and published research papers in international journals.