Tax on Income of Certain Domestic Companies

• Taxation
• ||
• August 19, 2020

In view of promoting investment and growth and to be competitive as a nation, especially with regard to rates of tax, the Government of India has coined a new section 115BAA in to the Income Tax Act, 1961 which provides a lower rate of tax for domestic companies in India with a view to give the benefit of a reduced corporate tax rate for such domestic companies. The section was introduced through a taxation ordinance passed on 20th of September 2019 and was later on confirmed, with a few modifications, by an Act of Parliament in December 2019 through the Taxation Laws (Amendment) Act, 2019. However, some other minor changes to the section were made through the Finance Act, 2020 as well.

As per the provisions of the section 115BAA the domestic companies in India have an option to pay tax @ 22% from the FY 2019-20 (AY 2020-21) onwards, irrespective of their turnover during the previous financial year, provided such domestic companies comply to certain conditions. This tax rate cut has brought a breathing space for many domestic companies resulting in lower cash outflow in terms of corporate tax.

Major effects of the section:

• Income of domestic companies is subject to tax @22% plus surcharge @10% and a cess @ 4%, leading effective tax rate to 25.168 % irrespective of total income;
• Minimum alternate tax (MAT) provisions are not applicable, i.e., the company would not be required to pay tax under provisions of MAT under section 115JB of Income Tax Act, 1961 if it opts for section 115BAA. It is worth noting that the MAT rate has been reduced from 18.5% to 15% with effect from financial year 2019-20;
• The domestic companies which opt for section 115BAA shall not be eligible to claim MAT credits for taxes paid under MAT provisions during the tax holiday period. It essence such companies would unable to reduce their tax liabilities under section 115BAA by claiming MAT credits;
• There is no stipulated time for domestic companies to opt for a lower tax rate under section 115BAA;
• A marginal relief will be given to domestic companies opting for Section 115BAA;
• Nevertheless, the introduction of section 115BAA is not an obligatory way to pay tax, companies must plan a tax strategy before deciding whether to opt for lower tax rate under section 115BAA

Non-Applicability:

• The provisions for lower rate of tax on income tax are not applicable to Individuals, Partnership Firms, LLPs, AOPs, Foreign Companies etc.

Comparison of Effective Tax Rate (inclusive of surcharge and cess) where company opts for Section 115BAA or not:

Conditions to be fulfilled under eligibility criteria of section 115BAA
The domestic companies can take the benefit of lower tax rate, provided the below mentioned conditions are complied with:

• No exemptions/incentives under various provisions of income tax shall be availed by companies opting for lower rate of tax. Hence, the computation of total income of such company shall be made without taking into consideration:
  • Any deductions especially available for units established in SEZs section 10AA.
  • Any additional depreciation or any investment allowance under section 32 and 32AD respectively for establishing new plant and machinery in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal;
  • Deduction under section 33AB for companies manufacturing tea, coffee and rubber;
  • Deduction for deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both;
  • A deduction for expenditure incurred for scientific research under section 35;
  • Deduction for the capital expenditure incurred by businesses specified in section 35AD;
  • Deduction for the amounts incurred on an agriculture extension project or on skill development project under section 35CCC and section 35CCD respectively;
  • Deductions under chapter VI-A with respect to certain incomes, allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, excluding deduction under section 80JJAA; and
  • Claiming a set-off of any loss carried forward, provided such losses were incurred in respect of the above mentioned deductions;
• Companies opting for lower tax rate under section 115BAA shall have to exercise this option on or before the due date of filing of income tax returns i.e., 30th September of the assessment year;

Illustration on set-off of Brought Forward Loss
Section 115BAA(1) states, as mentioned above, that the total income of company opting for lower tax rate shall be computed without claiming set-off of any loss carried forward from any previous assessment year which relates to the deductions excluded for computing total income under the section 115BAA. Consider the following illustration for understanding better conceptual understanding:

Suppose, a domestic company’s total income is ₹ 20 crores after making adjustments for all eligible deductions. It has carried forward loss amounts to Rs. 10 crore including Rs. 7 crore attributable to investment-linked deductions (section 35AD). Now assume, the company opts for section 115BAA, and then it cannot set off Rs. 7 crore loss (attributable to deductions excluded in the section 115BAA). However, the remaining loss of Rs. 3 crore can be set off for computing income for section 115BAA. Further, the company shall pay tax @25.168 % on total income of Rs. 17 crores calculated as follows:

Can a company opt out of this section?
Once a company opts for lower tax rate under section 115BAA in a financial year, it cannot subsequently withdraw the same and has to be followed for all the assessment years.

Here, at AJSH & Co LLP we do assist our clients in determining their tax liability, tax computation, filing of income tax return, tax advisory etc. If you have any questions or want to know more as how to determine the applicable tax rates and tax liabilities, please contact us.