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The Government of India has introduced the Taxation (Amendment) Ordinance 2019 on the 20th of September 2019. Several amendments are made to the Income Tax Act,1961 through this ordinance. Changes such as corporate tax rate cut for domestic companies and as well as for manufacturing companies was announced. Also, the MAT rate has been reduced from the current 18.5% to 15%.

New Section 115BAA introduced

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.

Conditions for eligibility criteria for Section 115BAA

New Effective Tax Rate for domestic companies under section 115BAA

The new effective tax rate, which will apply to domestic companies availing the benefit of section 115BAA is 25.168%. The break up such tax rate is as follows:

   

Base tax rate

Surcharge applicable

Cess

Effective tax rate

22%

10%

4%

22*1.10*1.04 = 25.168%

Section 115BAA and 115BAB : New tax rate for domestic and manufacturing companies

Other Points

Such companies will not be required to pay minimum alternate tax (MAT) under section 115JB of the act.
The domestic companies opting for section 115BAA will not be able to claim MAT credits for taxes paid under MAT during the tax holiday period. The companies would not be able to reduce their tax liabilities under section 115BAA by claiming MAT Credits. The CBDT may issue a clarification on MAT credits in case of companies opting for tax under section 115BAA.

Moreover, the domestic company opting for section 115BAA shall not be allowed to claim set-off of any brought forward depreciation (additional depreciation) for the assessment year in which the option has been exercised and future assessment years.

There is no timeline for the domestic companies to choose a lower tax rate under section 115BAA. So such companies can avail the benefit of section 115BAA after claiming the brought forward loss on account of additional depreciation and also utilizing the MAT credit against the regular tax payable if any.

Amendment of section 115JB

With effect from AY 2020-2021, the rate of tax u/s 115JB has been reduced from 18.50% to 15%.
The provisions of Section 115JB shall not apply to: -

1. Any income accruing or arising to a company from life insurance business u/s 115B

2. A company who has exercised the option referred u/s 115BAA or 115BAB.

Section 115BAB - Corporate tax rate for new manufacturing companies

The government has introduced a favorable tax regime for new manufacturing companies. The Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019 has inserted Section 115BAB offering a low tax rate of 15% (plus surcharge and cess) to new manufacturing companies.

Eligible companies are covered

A domestic company satisfying the specified conditions mentioned below can claim the benefit of section 115BAB. Domestic company includes a company formed and registered in India. The benefit is available from the financial year 2019-20 (AY 2020-21).

Criteria the benefits of a low corporate tax rate under section 115BAB


Corporate taxpayer opts for section 115BAB

A new manufacturing company can exercise the option to be taxed under section 115BAB. The company has to exercise the option on or before the due date of filing income tax returns i.e. usually 30th September of the assessment year. Once the company opts for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.

Tax liability under section 115BAB

The new effective tax rate, which will apply to domestic companies availing the benefit of section 115BAA is 17.16%. The break up such tax rate is as follows:

Base tax rate

Surcharge applicable

Cess

Effective tax rate

15

10%

4%

15*1.10*1.04 = 17.16%

Applicability of transfer pricing provisions

• In a case where due to a close connection between the company and any other person, or for any other reason, the business between them is so arranged such that the company earns more than ordinary profits, the assessing officer may ignore the excess profits. The Assessing Officer will take only the amount of profits reasonably deemed to be derived from the business.
• In a case where the business transaction involves a specified domestic transaction referred to in section 92BA, the profits of the transaction will be determined having regard to the arm's length price.

 

Amendment of section 115JB

With effect from AY 2020-2021, the rate of tax u/s 115JB has been reduced from 18.5% to 15%.

 

The provisions of Section 115JB shall not apply to: -

a. Any income accruing or arising to a company from life insurance business u/s 115B

bA company who has exercised the option referred u/s 115BAA or 115BAB.

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The authors can also be reached at Ayush7agarwal@gmail.com and Agarwal.piyush093@gmail.com

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