Section 115BAA Of Income Tax Act: Features, Eligibility And More

Taxes play a huge role in the business world since they are well known to have a great impact on the strategic development of companies. The one that stands out in the whole tax rulebook is Section 115BAA of the Income Tax Act 1961. It gives the Indian Businesses exactly what they want - a lower rate of 22% coupled with some exceptions for those who qualify. This section isn’t about just numbers - it’s about creating an environment that is conducive to doing business, encouraging investments and economic growth.

Let’s talk more about Section 115BAA in this article-
 

What Is Section 115BAA Of The Income Tax Act?

Beginning with the financial year 2019-20, Section 115BAA of the Income Tax Act, 1961, offers Indian residential firms the option to go with a lowered tax rate of 22% (plus additional charge as well as cess) by quitting particular exceptions as well as reductions. When a firm picks this choice it cannot be altered later on. The objective is to make the tax system easier as well as reduce the tax load for business.
 

Features Of Section 115BAA Of the Income Tax Act

Here are some highlighting features of Section 115BAA of the Income Tax Act -

• Reduced Tax Rate: Indian companies now have the option to pay corporate tax at a reduced rate of 22% with an additional 10% surcharge and 4% cess, making the overall effective tax rate 25.17% instead of the previous 30%.
   
• Exemption From MAT: Companies opting for this section are completely exempt from paying Minimum Alternate Tax (MAT).
   
• Lowered MAT Rate: The amendment also lowered the MAT rate from 18.5% to 15%.
   
• Flexibility: Companies have the freedom to opt out of the concessional tax regime and revert to the previous tax structure if they choose to do so.
   

Condition Of Section 115BAA Applicability

All domestic companies can choose to pay income tax at a rate of 22%, along with the applicable cess and surcharge. However, to avail of this reduced rate, companies must give up the following deductions as per the Income Tax Act -

Conditions Specified As Under Eligibility Criteria Of Section 115BAA

Domestic companies have the option to pay their income tax at the new rates outlined in Section 115BAA if they satisfy the following conditions -

• No Other Incentives Or Exemptions
  Companies choosing Section 115BAA must calculate their total income without taking into account any other incentives or exemptions provided by other sections of the Income Tax Act.
   
• Excluded Deductions
  Here is a table outlining the excluded deductions -

• Loss And Depreciation Set-Off
  If a company’s losses carried forward or depreciation for previous years are tied to those deductions mentioned earlier, they can’t use them to balance out.
  
  An amalgamated company can’t offset its carried-forward losses or an amalgamating company’s depreciation against income if they’re linked to the deductions mentioned earlier.
   
• Irrevocable Choice
  Companies need to decide whether to opt for taxation under Section 115BAA by the usual deadline for filing income tax returns, which is September 30 of a specific assessment year. Once they make this choice, it’s final and cannot be altered or withdrawn.
   
• No Restrictions On Turnover
  Domestic companies don’t have any turnover restrictions.
   
• Eligibility
  Both existing and new companies have the option to choose taxation as specified in Section 115BAA.
   

Tax Rate For Domestic Company As Under Section 115BAA Of The Income Tax Act

Here is a breakdown of tax rates for domestic companies as specified in Section 115BAA of the Income Tax Act -

The updated tax rate for domestic companies under Section 115BAA is 25.168%.

Exemptions Or Deductions Not Applicable To Companies Opting For Sections 115BA, 115BAA, or 115BAB

Appropriate Time To Choose Section 115BAA

When domestic companies are deciding whether to opt for the concessional tax rate under Section 115BAA, they should consider several key points to ensure it’s the right move for their financial strategy -

• Deadline For Assessment Year
  To take advantage of the concessional tax rate under Section 115BAA, companies should make their decision by the due date to file their income tax return for the relevant assessment year. This deadline is usually September 30.
   
• Financial Considerations
  To determine if opting for the lower tax rate under Section 115BAA, this decision is irreversible and cannot be changed or withdrawn in subsequent years. Therefore, it’s crucial to ensure that this choice aligns with the company’s long-term financial and strategic goals.
   
• Irrevocability
  Once you make a choice, it can't be changed or withdrawn in future years. Make sure your decision aligns with your long-term financial and strategic goals.
   
• Losses And Depreciation
  Take into account any carried forward losses and unabsorbed depreciation that would be disallowed under the new regime. Weigh the benefit of the reduced tax rate against the potential tax savings from using these losses or depreciation under the previous system.
   
• Current And Future Income
  If a company’s profits are holding steady or going up, they could save more money with the lower tax rate. On the flip side, if a company knows they’ll have a bunch of deductions coming up soon, they might stick with the current tax rules because it could end up saving them more.

Basically, by looking closely at these things, companies can figure out if it's a good idea to switch to the lower tax rates in Section 115BAA, and if so, when is the best time to do it.
 

What Is the New Effective Rate Applicable For Domestic Companies?

Here’s a breakdown of the new tax rates laid under this section -

Can Taxpayers Utilise MAT Credits If Section 115BAA Option Is Exercised?

When domestic companies go for Section 115BAA, they can’t use MAT credits for taxes paid during the tax holiday period or to lower their tax liabilities under this section. The Central Board of Direct Taxes(CBDT) might give more details on how MAT credits work for companies under the Section 115BAA tax regime.

Another point to note is that they won’t be able to use any carried forward depreciation, including additional depreciation, for the year they exercise this option and for subsequent years. This rule also applies to any past depreciation or losses linked to deductions not allowed under the new regime.
 

Can A Domestic Company Opt Out Of This Section?

Domestic companies that don’t want to use the reduced tax rate right away can choose to do so after their current tax holiday period or other exemptions/incentives expire. However, once you opt for the reduced rate under Section 115BAA of the Income Tax Act, 1961, that decision is final and cannot be reversed later on.
 

Comparison Of Effective Tax Rate

Here’s a comparison table outlining the difference in effective tax rates between choosing and not choosing section 115BAA -

Wrapping Up!

Section 115BAA of the Income Tax Act 1961 is a significant step towards simplifying taxation for Indian companies. By offering a reduced tax rate and exemptions, this section aims to create a more conducive environment for businesses, encouraging investment and economic development. However, companies must carefully weigh the benefits and implications of opting for this section, considering factors like eligibility criteria, loss of deductions and irreversibility of the decision. Ultimately, strategic financial planning and a thorough understanding of Section 115BAA are essential to make informed decisions that go with their long-term goals. Talking about planning, it is essential to buy insurance online to help protect your finances and ensure your and your family’s well-being.

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