Section 115BAA-Overview

What is Section 115BAA of the Income Tax Act, 1961?

With the Taxation (Amendment) Ordinance of 2019, the Indian government made a number of changes to the Income Tax Act of 1961. Through Sec 115BAA of Income Tax Act, the government established a tax-efficient way for businesses to report their revenue in order to promote corporate expansion and greater worldwide competitiveness. Sec 115BAA of Income Tax Act was passed in order to lower the corporate tax rate for Indian companies. 

Domestic firms can now pay tax at a rate of 22% rather than the 30% ordinary corporate tax rate in India thanks to the adjustment. This is on top of a 4% cess and a 10% fee. This new company tax system will take effect in the 2019–2020 fiscal year. The primary benefit of Section 115BAA is that it lowers the tax rate for domestic enterprises, which can save a significant amount of money on taxes. Before, domestic enterprises had to pay a 30% tax rate; now, Section 115BAA permits them to select a 22% tax rate. This tax rate cut is intended to stimulate company expansion and investment within the nation, both of which will advance economic growth.
 

Features of Section 115BAA

• Corporate tax in India is 22% + 4% cess and a 10% surcharge.
• The consequence is a change in the effective tax rate from 30% to 25.17%.
• If a business chooses to pay taxes under Section 115BAA, it is not required to pay the Minimum Alternate Tax (MAT).
• In the same act, the minimum alternate tax rate was likewise lowered from 18.5% to 15%.
• Companies might choose to abandon concessional tax and go back to the previous tax regime.

Implications for Companies Opting for Section 115BAA

Once a business elects to use section 115BAA, it is not eligible for any additional Income Tax Act exemptions or deductions. This suggests that the company isn't allowed to claim a deduction for costs under section 80C, 80D, and 80G. The only deductions allowed are those specified in section 115BAA. Furthermore, once a business selects section 115BAA, it cannot go back to the previous tax structure. After then, it will continue to pay taxes at the lowered rate of 22% for each and every assessment year. It's also important to keep in mind that companies engaged in the distribution or manufacturing of electricity are not qualified for sec 115baa of income tax act. The 30% tax rate that applied to these enterprises earlier still applies.

Eligibility criteria of section 115BAA

Domestic enterprises may elect to pay income tax at the increased tax rates imposed by sec 115baa of income tax act provided they satisfy the following requirements:

1. Businesses that want to pay taxes under Section 115BAA cannot, in any case, ask for extra advantages or exemptions from other I-T Act requirements. These companies have to figure out their total revenue without subtracting any of the following:

a) Any Section 10AA-permitted deductions for companies established in special economic zones

b) In certain developing states, such as West Bengal, Telangana, Andhra Pradesh, Bihar, and Telangana, additional depreciation under Section 32 and any investment allowance under Section 32AD for new machinery or plant

c) Any deduction allowed by Section 33AB for companies that manufacture tea, coffee, or rubber Any kind of deduction for specific businesses' capital expenses under Section 35AD

d) Deductions under Section 35 for expenses related to scientific research or any amount donated to a university, research institute, or Indian Institutes of Technology e-Deductions for any amount paid by a fossil fuel extraction company in compliance with Section 33ABA to a site rehabilitation fund 

f) Any deductions permitted by Chapter VI-A on particular incomes under Sections 80AC, 80IAC, 80IB, 80IA, and others 

g)Discounts or benefits under Section 35CCC for projects pertaining to agricultural extension or skill development under Section 35CCD 

h)Any depreciation of an amalgamating firm or any set-off of losses carried forward by the merged company, if the depreciation or losses relate to the aforementioned deductions

i) Any set-off for depreciation or losses carried forward from previous years, if these losses were related to the aforementioned deductions. 

2. Businesses may not assert any set-off for the aforementioned losses if they decide to apply new tax rates under sec 115baa of income tax act. 

3. Domestic companies have to choose between filing their IT returns by the deadline and being subject to Section 115BAA taxation. This day usually falls on September 30 of that particular evaluation year. The choice made by a business to tax under this provision cannot be subsequently changed or revoked. 

4. A domestic company's turnover is not restricted in any way. 

5. New and existing companies can elect to be subject to Section 115BAA taxation.

What are Domestic Companies under Section 115BAA New Tax Rates?

Here is a breakdown of tax rates for domestic companies as specified in Section 115BAA of the Income Tax Act 

MAT credits section 115BAA

For taxes paid under MAT during the tax holiday period, domestic enterprises who choose to utilize sec 115baa of income tax act will not be eligible to receive MAT credits. By claiming MAT credits, the corporations would not be able to lower their tax responsibilities under section 115BAA. If a business chooses to pay taxes under section 115BAA, the CBDT may provide clarity on MAT credits.

Modification of unabsorbed depreciation and carried forward losses for Section 115BAA purposes.
When a domestic corporation chooses to utilize section 115BAA, it forfeits the right to deduct any brought forward depreciation, or additional depreciation, from its assessments in both the year the option was exercised and subsequent assessment years.
 

Tax rate with and without Section 115BAA

Although selecting Section 115BAA leads to a marginally reduced effective tax rate, the firm will forfeit further tax benefits offered by the Income-tax Act. If a corporation decides not to employ Section 115BBA, it may still be able to claim certain incentives, deductions, exemptions, and additional depreciation authorized under the Income-tax Act. 

Can a company opt out of this section?

If domestic enterprises choose not to take advantage of this concessional rate right away, they can do so once their tax holiday period or previously indicated exemptions/incentives expire.

But once such a corporation chooses to use the concessional tax rate under Income Tax Act of 1961, section 115BAA, it cannot take that choice back.
 

Conclusion

Domestic businesses must first meet several requirements in order to be eligible for lower tax rates under Section 115BAA of the Income Tax Act. Companies that are already in operation can switch to this new tax structure at any moment with ease. Nevertheless, the corporation will forfeit its eligibility for further tax incentives under the I-T Act if it choose the new tax regime over the current one. Businesses who want to use Section 115BAA of the Income Tax Act should log onto the e-filing portal, fill out Form No. 10-IC, and submit it online. Domestic businesses must first meet several requirements in order to be eligible for lower tax rates under Section 115BAA of the Income Tax Act. Companies that are already in operation can switch to this new tax structure at any moment with ease.