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

Through the Taxation (Amendment) Ordinance, 2019, the government amended the Income Tax Act, 1961, in various manners. One of these amendments was the addition of Section 115BAA. The government lowered the corporate tax rate for domestic companies under Section 115BAA of Income Tax Act. The minimum alternate tax (MAT) rate decreased from 18.5% to 15%.

What is Section 115BAA?

Section 115BAA of the Income Tax Act, 1961, is an income tax provision in India that provides for a lower tax rate for specific individuals who receive income from a business or profession. If a corporation opts for Section 115BAA, which has a lower tax rate than the standard rate of tax that applies to people, it will not be liable for MAT (Minimum Alternate Tax).

Benefits of 115BAA

The purpose of this section is to offer tax relief to certain individuals and encourage them to start and run their businesses. If these businesses opt to pay tax under Section 115BAA, they are exempt from paying the minimum alternate tax. This new tax rate was effective for the 2019–20 fiscal year. It states that domestic businesses may pay tax at 22%, plus a surcharge and cess of 10% and 4%, respectively.

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Section 115BAA of Income Tax Act: Features

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

• Section 115BAA is an optional taxation system.
• A corporation does not have to pay the Minimum Alternate Tax if it chooses to take advantage of Section 115BAA benefits.
• Under Section 115BAA, a corporation can forgo the concessional tax and return to the previous tax system.
• For domestic businesses, the tax rate is 22% plus an extra cess and surcharge.

Section 115BAA of Income Tax Act: Eligibility conditions

Section 115BAA provides a special tax rate for certain companies engaged in manufacturing or producing any article or thing. The special tax rate under this section applies to companies that meet all of the following conditions:

• The company is engaged in the manufacture or production of anything and not engaged in any other business.
• The company is not claiming any deduction under sections 80-IA, 80-IB, 80-IC, or 80-ID.
• The company is not claiming any deduction under section 10AA (relating to special economic zone units).
• The company is not claiming any deduction under section 10B (relating to small-scale industries).
• The company does not claim any deduction under section 35AD (relating to a specified business).
• The company is not claiming any deduction under section 35CCC or 35CCD (relating to research and development).
• The company is not claiming any deduction under section 35 CCF (relating to infrastructure development).
• The company is not claiming any deduction under section 35 CCG (relating to business incubators).
• The company does not claim any deduction under section 35AD (relating to a specified business).
• The company is not claiming any deduction under section 35CCC or 35CCD (relating to research and development).
• The company is not claiming any deduction under section 35 CCF (relating to infrastructure development).
• The company is not claiming any deduction under section 35 CCG (relating to business incubators).
• Concessions resulting from losses and unreimbursed depreciation fall under Section 72A.
• Section 32A additional depreciation and Section 32AD investment allowance for establishing industries in designated backward districts of West Bengal, Telangana, Bihar, and Andhra Pradesh.
• Deductions for tea, coffee, and rubber fall under section 33AB.
• Except for sections 80JJAA, 80LA, and 80M, all deductions are under Chapter VI A.
• Set-off of losses that an integrating company carries forward or any depreciation it imposes if the depreciation or losses are related to the earlier deductions.
• Domestic corporations must decide whether to be taxed under Section 115BAA on or before the deadline for filing IT returns. Typically, this day falls on September 30 of a given assessment year. A corporation cannot later amend or withdraw its decision to be taxed under this clause.
• There are no restrictions on a domestic company’s turnover.
• Both new and existing firms can be taxed under Section 115BAA.

If a company meets all of the above conditions, it is eligible for the special tax rate as per Income Tax Act of 1961 Section 115BAA.

New tax rates for domestic companies for AY 2022-23

Under Section 115BAA, the new tax rate for domestic businesses will be 25.168%. 

Note: Companies that choose to be taxed under Section 115BAA’s tax rates are exempt from paying the minimum alternate tax.

Comparison of effective tax rate

Implications of 115BAA

A corporation that chooses Section 115BAA has an effective tax rate that is slightly lower. Still, these corporations are not eligible for other tax benefits listed in the Income Tax Act 1961. A firm has fewer options for deductions, exemptions, incentives, and further depreciation listed in the ITA, 1961, if it opts not to use Section 115BAA.

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