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INDEX

  • Understanding Section 115BAA of the Income Tax Act, 1961: Key Features and Benefits

  • Benefits of Section 115BAA

  • Key Features of Section 115BAA

  • Eligibility Conditions for Section 115BAA

  • Tax Rates Under Section 115BAA for AY 2024-25

  • Comparison of Effective Tax Rates: Section 115BAA vs Regular Tax Regime

  • Implications of Section 115BAA

Section 115BAA of Income Tax Act: Corporate tax rate for domestic Co.

Understanding Section 115BAA of the Income Tax Act, 1961: Key Features and Benefits

Section 115BAA of the Income Tax Act, 1961 is a provision that allows domestic manufacturing companies to opt for a reduced tax rate under specific conditions. Introduced to simplify tax compliance and provide relief to businesses, it offers an attractive tax rate compared to the standard corporate tax rates. Companies that choose this option will be exempt from the Minimum Alternate Tax (MAT).

Benefits of Section 115BAA

The primary aim of Section 115BAA is to encourage businesses, particularly in the manufacturing sector, to benefit from a more simplified and lower tax regime. Under this provision, eligible companies are granted the following advantages:

  • Lower Tax Rate: Domestic manufacturing businesses can pay tax at 22% on their income.
  • Exemption from MAT: Companies opting for Section 115BAA are not subject to Minimum Alternate Tax (MAT), which is typically imposed on companies with low taxable income.
  • Cess and Surcharge: In addition to the base tax rate, companies are subject to a 10% surcharge and a 4% health and education cess.

This tax benefit was made available from the FY 2019-20 (Assessment Year 2020-21), providing a significant tax reduction for eligible manufacturing companies.

Key Features of Section 115BAA

Here are the prominent features of Section 115BAA:

  1. Optional Tax Regime: Companies can choose to be taxed under Section 115BAA. It is not mandatory but an optional taxation system.
  2. No MAT for Opted Companies: Unlike the regular tax regime, companies electing for Section 115BAA are not subject to Minimum Alternate Tax (MAT), which can be a financial relief for many businesses.
  3. Return to Previous Tax System: Companies opting for Section 115BAA can return to the old tax system at any time, provided they forgo the concessional tax rate in the future.
  4. Tax Rate: The applicable tax rate under this section is 22%, with an additional 10% surcharge and 4% health and education cess, leading to an effective tax rate of 25.168%.

Eligibility Conditions for Section 115BAA

Section 115BAA applies to companies that are engaged in manufacturing or producing any article or thing. To qualify for the benefits under this section, the following conditions must be met:

  1. Business Type: The company must be exclusively involved in manufacturing or production activities. The benefits do not extend to companies engaged in any other type of business.
  2. No Deductions Under Specific Sections: The company must not claim deductions under various sections such as:
    • Section 80-IA, 80-IB, 80-IC, 80-ID (relating to deductions for specific industries or units).
    • Section 10AA (special economic zone units).
    • Section 10B (small-scale industries).
    • Section 35AD (capital expenditure for specified businesses).
    • Section 35CCC and 35CCD (research and development incentives).
    • Other similar deductions.
  3. No Claim for Certain Depreciations: The company must not claim certain forms of depreciation under sections like 32AD (investment allowance for backward areas) and 33AB (rubber, tea, and coffee production).
  4. Set-Off of Losses: The company cannot claim set-off of losses carried forward or depreciation related to any of the above deductions from previous years.
  5. No Restrictions on Turnover: Unlike other provisions, there are no restrictions on the turnover of the company, meaning both new and existing businesses can opt for Section 115BAA.
  6. Deadline for Election: Companies must elect to be taxed under Section 115BAA by the due date for filing Income Tax Returns (ITR). This typically falls on September 30 of the assessment year.

Tax Rates Under Section 115BAA for FY 2024-25

For domestic companies opting for Section 115BAA, the new tax rate is as follows:

  • Base Tax Rate: 22%.
  • Surcharge: 10% if total income exceeds Rs. 1 crore but is below Rs. 10 crore; 12% if income exceeds Rs. 10 crore.
  • Cess: 4% on the total tax payable.

Hence, the effective tax rate for companies opting for Section 115BAA is calculated as:

Effective Tax Rate=22%×1.10×1.04=25.168%\text{Effective Tax Rate} = 22\% \times 1.10 \times 1.04 = 25.168\%

Comparison of Effective Tax Rates: Section 115BAA vs Regular Tax Regime

Here’s a comparison of the effective tax rates for companies opting for Section 115BAA versus those who do not:

Net Earnings

Effective Tax Rate with Section 115BAA

Effective Tax Rate without Section 115BAA

Up to Rs. 1 crore

25.17%

26%

Above Rs. 1 crore but ≤ Rs. 10 crore

25.17%

27.82%

Above Rs. 10 crore

25.17%

29.12%

As seen from the table, opting for Section 115BAA results in a slightly lower effective tax rate compared to the regular tax regime, especially for businesses with earnings exceeding Rs. 1 crore.

Implications of Section 115BAA

While Section 115BAA offers a reduced tax rate, it comes with certain trade-offs:

  1. Exemption from Tax Benefits: Companies that opt for Section 115BAA forgo several deductions, exemptions, and incentives available under the Income Tax Act, including those related to research and development, special economic zones, and infrastructure development.
  2. Limited Flexibility: Once a company opts for Section 115BAA, it cannot amend or withdraw its decision during the same assessment year. Therefore, the company must carefully evaluate whether it will benefit in the long term by choosing this tax regime.

Conclusion

Section 115BAA is an attractive option for domestic manufacturing companies that are not heavily reliant on deductions, exemptions, and incentives under other sections of the Income Tax Act. It offers a lower tax rate of 22%, making it a good choice for companies seeking simplified tax compliance. However, businesses should evaluate their eligibility and tax planning strategies carefully before opting for this provision to ensure they maximize their long-term tax benefits.

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