Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

Section 115BAA – Lower Tax Rate on Domestic Companies

Introduction

The Taxation Law (Amendment) Ordinance 2019 introduce Section 115BAA on 20th September 2019 applicable from the financial year 2019-20.

Lower Income Tax Rate

This section provides an option only to domestic companies to pay income tax at the rate of 22% (plus applicable surcharge and cess) beginning from the financial year 2019-20. The domestic company can opt for lower-income tax rate during any financial year (2019-20 or thereafter). However, the option once exercised,can not be subsequently withdrawn and shall apply to all the subsequent financial years.

Note: – Flat surcharge of 10% (irrespective of turnover) along with 4% cess is applicable to the companies opting lower tax rate under Section 115BAA.

Eligibility Criteria

Any domestic companies have an option to pay a lower income tax rate of 22% (plus applicable surcharge and cess), provided the following conditions are complied with: –

  1. The total income of the company should be computed without giving any benefits/exemptions/deductions under:-
  • Section 10AA of the Act relating to unit established in Special Economic Zones (SEZ).
  • Section 32(1)(iia) of the Act for additional depreciation allowance.
  • Section 32AD of the Act relating to deduction for investment in new plant and machinery in notified backward area in the states of Andhra Pradesh, Bihar, Telangana and West Bengal.
  • Section 33AB of the Act for tea/ coffee/ rubber development allowance.
  • Section 33ABA of the Act for site restoration fund by companies engaged in the extraction of production of petroleum or natural gas or both in India.
  • Section 35(1) (ii), (iia),(iii) and 35(2AA), (2AB)of the Act for certainscientific researchexpenditure.
  • Section 35AD of the Act for deduction in respect of capital expenditure on specified business.
  • Section 35CCC of the Act for expenditure on an agricultural extension project.
  • Section 35CCD of the Act for Expenditure on the skill development project.
  • Part Cof Chapter VIA other than section 80JJAA of the Act(deduction in respect of employment of new employees).
  1. Without set-off, any loss carried forward from an earlier year to the extent that such loss is attributable to any of the deduction mentioned above in point (a). However, it shall be deemed to have been already given effect to and no further deduction for such loss shall be allowed for any subsequent year.
  2. By claiming the depreciation, if any, under section 32, other than clause additional depreciation under section 32(1)(iia) of the Act, determined in such manner as may be prescribed. In other words, domestic companies can claim depreciation under Section 32 but benefits for additional depreciation shall not be available.
  3. The option should be exercised by the domestic companies in the prescribed manner on or before the due date specified under Section 139(1) for furnishing the return of income for any financial year i.e. usually 30th September of the assessment year.
  4. Provision of Section 115JB relating to MAT shall not be applicable to the domestic companies which exercise option under Section 115BAA. It is also clarified that the tax credit of MAT paid by the domestic company shall not be available consequent to exercising of such option.

Note: – There is no time limit for the domestic company to opt for lower-income tax under Section 115BAA. So, the companies can opt for the benefit of Section 115BAA once they set- all the brought forward losses and MAT credit under the regular tax regime.

Comparative Effective Tax Rate for Financial Year 2019-20

  • If the turnover or gross receipts of the company does not exceed Rs. 400 crore during the financial year 2017-18 and have an income lower than Rs. 1 crore during the financial year 2019-20
Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Tax Rate 22% 25%
Surcharge 10% NA
Education Cess 4% 4%
Effective Tax Rate 25.17% 26%
  • If the turnover or gross receipts of the company does not exceed Rs. 400 crore during financial year 2017-18 and have income more than Rs. 1 crore but uptoRs. 10 crore during financial year 2019-20
Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Tax Rate 22% 25%
Surcharge 10% 7%
Education Cess 4% 4%
Effective Tax Rate 25.17% 27.82%
  • If the turnover or gross receipts of the company does not exceed Rs. 400 crore during financial year 2017-18 and have income more than Rs. 10 crore during financial year 2019-20
Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Tax Rate 22% 25%
Surcharge 10% 12%
Education Cess 4% 4%
Effective Tax Rate 25.17% 29.12%
  • If the turnover or gross receipts of the company exceed Rs. 400 crore during financial year 2017-18 and have income lower than Rs. 1 crore during financial year 2019-20
Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Tax Rate 22% 30%
Surcharge 10% NA
Education Cess 4% 4%
Effective Tax Rate 25.17% 31.20%
  • If the turnover or gross receipts of the companyexceed Rs. 400 crore during financial year 2017-18 and have income more than Rs. 1 crore but upto Rs. 10 crore during financial year 2019-20
Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Tax Rate 22% 30%
Surcharge 10% 7%
Education Cess 4% 4%
Effective Tax Rate 25.17% 33.38%
  • If the turnover or gross receipts of the companyexceed Rs. 400 crore during financial year 2017-18 and have income more than Rs. 10 crore during financial year 2019-20
Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Tax Rate 22% 30%
Surcharge 10% 12%
Education Cess 4% 4%
Effective Tax Rate 25.17% 34..%

Note: – MAT is also applicable @ 15% on the companies who does not opt Section 115BAA.

Conclusion

Government reduce the tax rate on corporates which is a welcome move to boost the economy. Whereas, on the other hand, take our the various benefits/exemption available like additional depreciation etc. Every corporate has to consider various factors before opting Section 115BAA like: –

  • Balance of brought forward losses
  • Available MAT credit
  • Current taxable income and projected income
  • Current turnover and projected turnover
  • The pattern of investment in plant and machinery for additional depreciation
  • MAT applicability
  • Various exemption not available under Section 115BAA
  • Cash flows

Let’s understand the end result of a company with a simple example. Assuming a domestic company having the turnover less than Rs. 400 crore during the financial year 2017-18 and having a total income of Rs 20 lakh during the financial year 2019-20. His tax liability shall be as follow: –

Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Total Income 20,00,000 20,00,000
Tax Rate 22% 25%
Tax Amount 4,40,000 5,00,000
Add: Surcharge (10%) 44,000 NA
Tax After Surcharge 4,84,000 5,00,000
Add: 4% Cess 19,360 20,000
Total Tax Liability 5,03,360 5,20,000
Saving/Loss 16,640

In the above example, if we assume that the company made an investment in plant and machinery of Rs. 10 lakh during the financial year 2018-19 then the tax calculation will be as follows: –

Particulars Opt Section 115BAA Doesn’t Opt Section 115BAA
Total Income 20,00,000 20,00,000
Less: Additional depreciation under section 32(1)(iia) @ 20% 2,00,000
Total Income 20,00,000 18,00,000
Tax Rate 22% 25%
Tax Amount 4,40,000 4,50,000
Add: Surcharge (10%) 44,000 NA
Tax After Surcharge 4,84,000 4,50,000
Add: 4% Cess 19,360 18,000
Total Tax Liability 5,03,360 4,68,000
Saving/Loss (35,360)


The end result will be different for each and every corporate as you can see in the above example. It’s a one-way road, you can opt Section 115BAA any time but there is no way to opt-out.

Rohit Pithisaria

Rohit Pithisaria

I am a Chartered Accountant based in Jaipur (Rajasthan). Started TaxAdda in 2011 as a blog and now providing various services related to GST and Income Tax to the client all over India.

Read More Articles


Are you a CA or GST Practioner?Manage your GST Practice in an
easy way






Leave all hassles of Excel/Google Sheets
Know about Awesome Features!
close-link
SUBMIT YOUR QUERY

Upgrade to paid query in Rs. 499 and get answer within 24 hours

NOTE - You may get answer to free queries within 30 working days
KNOW MORE!
close-link