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Section 115BAA: Tax on Income of Certain Domestic Companies

Currently, most of the companies are operating at 75-80% capacity amidst slow consumer demand. The corporate tax rate cut is bound to raise the margins of manufacturers and they, in turn, can pass on some of the benefits to the consumer.

India's economic growth is sitting at a six-year low and the government has taken a series of steps to boost the economy. Therefore, in its continuing endeavour to provide the requisite momentum to the growth process and create an enabling business environment, the Union Finance Minister on Friday, September 20, 2019 announced major reforms in the corporate tax structure of the country.

It feels that these are steps in the right direction and enable India to achieve its vision of becoming a $ 5 trillion economy by 2024.

Bare Text-
  1. Notwithstanding anything contained in this Act [Income Tax Act, 1961] but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAB, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of twenty-two per cent, if the conditions contained in sub-section (2) are satisfied:

    Provided that where the person fails to satisfy the conditions contained in sub-section (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and subsequent assessment years and other provisions of the Act shall apply, as if the option had not been exercised for the assessment year relevant to that previous year and subsequent assessment years.
  2. For the purposes of sub-section (1), the total income of the company shall be computed-
    (i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading "C.—Deductions in respect of certain incomes" other than the provisions of section 80JJAA;

    (ii) without set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i);

    (iii) without set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A, if such loss or depreciation is attributable to any of the deductions referred to in clause (i); and
    by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.
  3. The loss and depreciation referred to in clause (ii) and clause (iii) of sub-section (2) shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year:
    Provided that where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2020, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020.
  4. In case of a person, having a Unit in the International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, which has exercised option under sub-section (5), the conditions contained in sub-section (2) shall be modified to the extent that the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in the said section.
    Explanation- For the purposes of this sub-section, the term "Unit" shall have the same meaning as assigned to it in clause (zc) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).
  5. Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under sub-section (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after the 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:
    Provided that in case of a person, where the option exercised by it under section 115BAB has been rendered invalid due to violation of conditions contained in sub-clause (ii) or sub-clause (iii) of clause (a), or clause (b) of sub-section (2) of said section, such person may exercise option under this section:

    Provided further that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.
Corresponding Amendment in Section 115JB (Special provision for payment of tax by certain companies)
(5A) The provisions of this section shall not apply to-
(ii) a person who has exercised the option referred to under section 115BAA or section 115BAB.

Analysis-
  1. This section shall have overriding effect over all the provisions of the Income Tax Act, 1961 except provisions of this chapter (i.e. Chapter XII). Thus, concessional rates provided under section 111A (15%), section 112 (20%), 112A (10%) shall be applicable to the company as these sections fall under chapter XII only and the company will be allowed to pay tax at lower rate in respect of such incomes.
  2. The total income of a domestic company for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at its option, can be computed at the rate of twenty-two per cent (22%), if the following conditions are satisfied:
    a) While computing the total income no deduction under the following provisions shall be allowed:
    i. Section 10AA {Special provisions in respect of newly established Units in Special Economic Zones} or
    ii. Section 32(1)(iia) {Additional depreciation} or section 32AD {Investment in new plant or machinery in notified backward areas in certain States} or
    iii. Section 33AB {Tea, Coffee, Rubber deduction} or section 33ABA {Site Restoration Fund} or
    iv. Section 35(1)(ii) or Section 35(1)(iia) or Section 35(1)(iii) or Section 35(2AA) or Section 35(2AB) {Expenditure on Scientific Research} or
    v. Section 35AD {Deduction in respect of expenditure on specified business} or section 35CCC {Expenditure on agricultural extension project} or section 35CCD {Expenditure on skill development project} or
    vi. Any provisions of Chapter VI-A under the heading "C.—Deductions in respect of certain incomes" other than the provisions of section 80JJAA;

    b) Set off of any brought forward losses or unabsorbed depreciation shall not be allowed if such loss or depreciation is attributable to any of the deductions referred to in point (a) above.

    c) Set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A {Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc.} shall not be allowed if such loss or depreciation is attributable to any of the deductions referred to in point (a) above; and

    d) Depreciation, if any, under any provision of section 32, except additional depreciation shall be allowed in such manner as may be prescribed.
  3. If the person fails to satisfy the conditions mentioned above in any previous year, the option shall become invalid in respect of such previous year and subsequent years and other provisions of the Act shall apply, as if the option had not been exercised for the previous year and subsequent years.
  4. The loss and depreciation referred to in point (b) and point (c) above shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year.
    Provided that where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2020, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020.
  5. In case, a domestic company which has exercised option under this section has a Unit in the International Financial Services Centre as referred to in section 80LA(1A), the conditions mentioned above (a to d) shall be modified to the extent that the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in section 80LA.

    Explanation- For the purposes of this point, the term "Unit" shall have the same meaning as assigned to it in Section 2(zc) of the Special Economic Zones Act, 2005.
  6. Any domestic company who wants to avail this option shall exercise it in the prescribed manner on or before the due date specified under section 139(1) for furnishing the returns of income for any previous year commencing on or after the 1st April, 2019 and such option once exercised shall apply to subsequent assessment years.
  7. Where the option exercised by any person under Section 115BAB {Tax on income of new manufacturing domestic companies} has been rendered invalid due to violation of conditions contained in clause (a)(ii)/(a)(iii) or clause (b) of sub-section (2) of said section, such person may exercise option under this section.
  8. Once the option given under this section has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.
  9. The effective rate of tax under this section shall be 25.17% (Tax - 22% plus surcharge - 10% plus health and education tax - 4%).
  10. Further, the provisions of Section 115JB (Minimum Alternate tax) shall not apply to a domestic company which has exercised option to pay tax under this section. Therefore, No MAT liability shall arise on any Book profit.
However, it is pertinent to mention that with the prohibition of exemption/deductions mentioned in point (a to d), the difference in the book profit and the income computed under normal provision may not be much. Thus, such companies will not normally otherwise be liable for MAT.

Benefits/Comparison With Normal Tax Rates

Benefit to companies whose turnover does not exceed Rs. 400 crore in previous year 2017-18 shall be as follows-

Category of taxpayers Domestic Companies whose turnover in Previous Year 2017-18 does not exceed Rs. 400 crore
Tax under normal provisions Tax under section 115BAA Net savings in taxes (in %)
Income upto Rs. 1 crore 26.00% 25.17% 0.83%
Income more than Rs. 1 crore but upto Rs. 10 crore 27.82% 25.17% 2.65%
Income more than Rs. 10 crore 29.12% 25.17% 3.95%

Benefit to companies whose turnover exceeds Rs. 400 crore in previous year 2017-18 shall be as follows-

Category of taxpayers Domestic Companies whose turnover in Previous Year 2017-18 does not exceed Rs. 400 crore
Tax under normal provisions Tax under section 115BAA Net savings in taxes (in %)
Income upto Rs. 1 crore 31.20% 25.17% 6.03%
Income more than Rs. 1 crore but upto Rs. 10 crore 33.38% 25.17% 8.21%
Income more than Rs. 10 crore 34.94% 25.17% 9.77%

Conclusion
There is no timeline to avail the option given under this section, therefore old as well as new domestic companies at their option can anytime switch to this new tax regime. However, option once exercised under this section cannot be revoked in any subsequent financial year.

Further, presently if any company is availing the deductions and exemptions as mentioned in point no. “a to d” above, it may switch to this regime after exhausting all those benefits available. 

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