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Section 115BAA – New Tax Rate for Domestic Companies

Introduction

The new section – Section 115BAA has been inserted in the Income Tax Act,1961 to give the benefit of a reduced corporate tax rate for the domestic companies. Section 115BAA states that domestic companies have the option to pay tax at a rate of 22% from the FY 2019-20 (AY 2020-21) onwards if such domestic companies adhere to certain conditions specified.

Eligibility:

The benefit of availing the lower tax rate shall apply only to domestic companies. It does not apply to LLPs, partnership firm, foreign companies etc.

Conditions to opt for Section 115BAA

Companies opting for section 115BAA should not avail any exemptions/incentives under different provisions of income tax. Therefore, the total income of such company shall be computed without:

  • Claiming any deduction especially available for units established in special economic zones under section 10AA
  • Claiming additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal
  • Claiming deduction under section 33AB for tea, coffee and rubber manufacturing companies
  • Claiming deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
  • Claiming a deduction for expenditure made for scientific research under section 35
  • Claiming a deduction for the capital expenditure incurred by any specified business under section 35AD
  • Claiming a deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
  • Claiming deduction under chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
  • Companies shall not claim a set-off of any loss carried forward from earlier years, if such losses were incurred in respect of the aforementioned deductions.

MAT credit u/s 115JAA:

  • Companies opting for Section 115BAA will not be required to pay minimum alternate tax (MAT) under section 115JB of the act.
  • The companies would not be able to reduce their tax liabilities under section 115BAA by claiming MAT credits

Other aspects:

  • Once the option is exercised, then subsequent revocation of section 115BAA is not possible
  • There will be a surcharge @10% irrespective of the income
  • The effective tax rate will 25.168%, including the surcharge of 10% and 4% cess

Conclusion:

The domestic companies who do not wish to avail this concessional rate immediately can opt for the same after the expiry of their tax holiday period or exemptions/incentives as mentioned.

However, once such a company opts for the concessional tax rate under section 115BAA of the Income Tax Act,1961, it cannot be subsequently withdrawn.

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