Analysis of Section 115BA, 115BAA, 115BAB of Income Tax

Introduction

The Government of India has introduced the Taxation (Amendment) Ordinance Act, 2019, on the 20th of September 2019. Several amendments are made in the Income Tax Act, 1961 through this ordinance. Section 115BAA, Section 115BAB were inserted in the Income Tax Act, 1961, by the Finance Minister, Nirmala Sitharaman, in the Union Budget 2020. These sections were inserted in order to give benefit of the reduced tax rate of the domestic companies. While existing domestic companies have been provided an option to pay tax at a concessional rate of 22%, new domestic companies set up on or after 1 October 2019, and commencing manufacturing before 31 March 2023, would have the option to pay tax at 15%. However, the reduced tax rates come with consequential surrender of specified deductions/ incentives. No minimum alternate tax (MAT) would be applicable in either of these options. Companies that do not opt for the concessional tax rates will continue to enjoy the benefit of such specified deductions/incentives, be subject to MAT at 15%.

Let us discuss these sections in detail hereafter.

Section 115BAA- Tax on income of certain domestic companies

Any domestic company has an option to pay tax at 22%, subject to the following conditions:

1. any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” other than the provisions of section 80JJAA;
2. set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to above;
3. set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A, if such loss or depreciation is attributable to any of the deductions referred to above; and
4. by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

However, losses and depreciation would be deemed that full effect has already been given and no further deduction shall be allowed for any subsequent years.

The option needs to be exercised before the due date as per section 139(1) for furnishing the return of income for any previous year starting from AY 2020-21 or subsequent assessment years.

If once the option is exercised cannot be withdrawn for the same or subsequent assessment years. (With effect from AY 2020-21)

Section 115BAB- Tax on income of new manufacturing domestic companies

Any domestic manufacturing company has an option to pay tax at 15%, subject to the following conditions:

1. any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” other than the provisions of section 80JJAA;
2. set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to above;
3. set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A, if such loss or depreciation is attributable to any of the deductions referred to above; and
4. by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed. 

However, losses and depreciation would be deemed that full effect has already been given and no further deduction shall be allowed for any subsequent years.

Such Company:-

1. Is incorporated on or after 1 October 2019, and commences production on or before 31 March 2023.
2. Is not formed by splitting up or reconstruction of business already in existence (exception provided for undertaking formed as a result of reestablishment, reconstruction or revival of business referred to in section 33B of the Act).
3. Does not use any building previously used as a hotel or convention centre.
4. Is not engaged in any business other than the manufacture or production of an article or thing and research in relation to or distribution of article or thing manufactured or produced by it.

• The option needs to be exercised before the due date as per section 139(1) for furnishing the return of income for any previous year starting from AY 2020-21 or subsequent assessment years.
• If once the option is exercised cannot be withdrawn for the same or subsequent assessment years.
• Provisions similar to section 80IA(10) of the Act are made applicable for transactions between connected parties which has the effect of producing more than ordinary profit that might be expected to arise.
• Domestic transfer pricing provisions under section 92BA of the Act is being made applicable to such transactions. The corresponding amendment has been made in section 92BA of the Act to consider such transactions as specified domestic transactions in  order to bring it within the ambit of transfer pricing provisions.

Section 115BA (Existing amended provisions)

• Corresponding amendments has been made to section 115BA to provide that it would apply to companies other than those mentioned in sections 115BAA and 115BAB of the Act.
• For a person exercising option under section 115BAB of the Act, the option under section 115BA of the Act may be withdrawn. (With effect from AY 2020-21).

Conclusion

Any Corporate planning to opt the benefit of the new sections must read the sections, rules and notifications carefully to avoid unwanted difficulties and litigations before going forward. 

Disclaimer-  The contents of this document are solely for informational purpose. It does not constitute professional advice or formal recommendation. While due care has been taken in preparing this document. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information nor any other action taken in reliance thereon. 

References

• http://www.incometaxindia.gov.in
• Highlights of the Union Budget 2020