Income Tax provisions are an important part of the country’s economy. The income tax rates are set for the betterment of the citizens of the country and the government. Taxes help in the betterment of the country in different regions. Several amendments have been made to the Indian Income Tax Act of 1961 over the years. Section 115BAA is one of the recent Income Tax Act amendments, which deals with tax rate reductions in several provisions.
What is Section 115BAA of the Income Tax Act?
The Income Tax Act of 1961 was revised with the addition of Section 115BAA, which grants domestic businesses a reduced corporate tax rate. In accordance with this Section, the businesses are allowed to pay the tax at an effective rate of 22% along with the 10% surcharge and 4% cess. According to this, if these businesses decide to pay the tax according to this provision, they may opt not to pay the minimum alternate tax.
This clause was included in the Finance Act 2019 and came into force on April 1, 2020. Domestic enterprises that satisfy specific requirements are eligible for the lowered tax rate under Section 115BAA of the Income Tax Act. It was implemented as a part of the government’s initiatives to strengthen the domestic economy and promote investment in homegrown businesses.
What is a Domestic Company under the Income Tax Act?
A domestic company is an Indian business or any other business that has established the necessary preparations for the payment and declaration of dividends (which includes dividends on their priority shares) to be paid based on the earnings within India, as required by the Income-tax Act, with regard to its revenue subject to taxation under that Act. Therefore, all Indian companies are considered the same way as domestic companies, although not all domestic companies are Indian. A foreign company will be considered a domestic company if it makes the necessary arrangements for paying dividends in India.
Features of Section 115BAA of the Income Tax Act
The distinct features of section 115BAA are given as follows:
- The corporate tax rate for Indian domestic businesses is 22% plus a 10% surcharge and 4% cess.
- The newly established applicable tax rate, which was formerly 30%, is now 25.17%.
- A business is exempt from the Minimum Alternate Tax (MAT) if it decides to pay the tax under Section 115BAA.
- The minimum alternate tax rate has been reduced from 18.5% to 15% in the current amendment.
- Companies have the option to disregard the subsidised tax and transition back to the old tax structure.
- The use of an alternate system indicates that the stated provision’s applicability is not necessarily required.
Eligibility for Section 115BAA of the Income Tax Act
A. Companies that would like to pay tax in accordance with Section 115BAA are not entitled to extra benefits or deductions under any additional sections of the I-T Act. These businesses are required to calculate their overall earnings without considering the following:
- Any deductions applicable to business enterprises set up in designated economic regions under Section 10AA.
- For new equipment purchased in economically underdeveloped areas of states like Andhra Pradesh, West Bengal, Bihar and Telangana, additional depreciation as described in Section 32 and any kind of investment allowance under Section 32AD may be granted.
- Additional deductions under Section 33AB for businesses producing rubber, coffee, or tea.
- Deductions of all kinds for certain enterprises’ capital expenses under Section 35AD.
- Deductions under Section 35 for costs incurred with regard to conducting scientific research and for any amounts given to research institutions, universities, or IITs.
- Deductions for contributions made by any business involved in the collection of fossil fuels to a facility for site restoration that complies with Section 33ABA.
- Any deductions are allowed under Chapter VI-A for specific types of income under Sections 80AC, 80IAC, 80IB, and additional sections (with Sections 80M and 80JJAA exceptions).
- Advantages or exemptions under Section 35CCC for programs enhancing agricultural production or any other skill development program under Section 35CCD.
- Any compensation for losses carried over or depreciation from previous fiscal years if those losses relate to the relevant reductions.
- A claim filed by a merged enterprise for compensation of carried-forward losses or unrecoverable depreciation due to a merging company, provided that the losses or unabsorbed depreciation are due to any of the aforesaid deductions, requesting an exemption for additional/accelerated depreciation. However, usual depreciation may be reimbursed.
B. If a company chooses the increased tax rates under Section 115BAA, it should not claim any set-off for the above financial losses.
C. Domestic businesses must decide whether to be taxed under Section 115BAA before the deadline for submitting IT returns. The due date generally falls on September 30 of a certain assessment year. When a business decides to be taxed under this clause, it can not modify or retract the decision afterward.
The decision must be submitted in Form 10-IC, as the CBDT advises. Online submission of the form must be done either with a digital signature or an electronic authentication code.
D. Any established business can transition into this sector anytime, and there are no restrictions on turnover or the requirement that the business be completely new.
New Effective Tax Rate Under Section 115BAA
Businesses may use Section 115BAA in accordance with ITA Rule No. 21AE. They must submit form 10-IC of the ITA if they want to choose this alternative. Section 139(1) of the Internal Revenue Code of 1962 must be filed on or before the deadline for filing income tax returns.
The new income tax rate under Section 115BAA for domestic businesses is 25.168%. The following table shows the breakdown of the new tax rate under section 115BAA of the Income Tax Act:
|Base Tax Rate||Surcharge applicable||New Effective Tax Rate||Cess|
Section 115BAA of the Income Tax Act is an important amendment for the domestic companies in India. Domestic businesses must fulfil particular requirements if they want to qualify for a lower tax rate under Section 115BAA of the Income Tax Act. Existing businesses can readily transition to this revised tax system anytime they want. A business that chooses section 115BAA will calculate its yearly revenue without taking certain deductions into account.
FAQs on Section 115BAA of the Income Tax Act
1. Do we need to file Section 115BAA every year?
No, if a domestic company has once selected section 115BAA of the Income Tax Act, it must apply every year. The deductions will be made in the upcoming years according to new tax rates, and they can not withdraw from it.
2. What are the consequences of late filing of Form 10-IC?
The person who fails to file the form 10-IC on time will be denied the concessional tax rate of 20%.
3. When a domestic company can opt for Section 15BAB?
If a domestic business reaches the following requirements, it is eligible for the benefits of Section 115BAB of the Income Tax Act: the business must be a domestic company created and registered on or after October 1, 2019, and it has to have begun production before or on March 31, 2024.
4. What is the maximum surcharge in a domestic company?
The maximum surcharge in a domestic business is 25%.
5. What is the difference between Section 115BAB and Section 115BAA of the Income Tax Act?
All domestic businesses are covered by Section 115BAA, which entitles them to a 22% tax rate reduction in exchange for giving up certain exemptions. On the contrary side, Section 115BAB concentrates on new manufacturing businesses and offers them a substantially reduced tax rate of 15%.