Section 115BAA – 22% Tax on non-manufacturing Companies (Better than normal 25% tax rate)

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On Friday, 20^th September, 2019 everyone was ready for some announcement regarding discontinuance of GSTR 9 etc from our Finance Minister Nirmala Sitharam. However, to everyone’s surprise the meeting turned out to be an announcement on change in corporate tax rate in India and the headlines were that Corporate Tax rate has been reduced to 15% for manufacturing company and 22% for non-manufacturing company and also many people have addressed this meeting as a mini budget announcement and the changes made in this meeting has been brought into effect by an ordinance, so let’s discuss the newly inserted section 115BAA in brief in this post.

The Bare act language for this section is as follows:

“1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAB, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of twenty-two per cent., if the conditions contained in sub-section (2) are satisfied.

(2) For the purposes of sub-section (1), the following conditions shall apply subject to the condition that the total income of the company has been computed,-

            (i) without 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;

            (ii) without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i); and

            (iii) by claiming the depreciation, if any, under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

(3) The loss referred to in sub-clause (ii) of sub-section (2) shall be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

(4) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under sub-section (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:

Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.”

Some important points from above section:

1. This section is applicable to domestic companies from A.Y. 2020-21, not necessarily registered in current year.
2. The income of such company must be calculated without claiming any deduction as mentioned in clause (i) above which basically includes deduction of income from SEZ, deduction of investment in machinery by manufacturing unit, deduction for investment in various fund, deduction for expense on research and development, deduction for income from specified business, expenditure on special projects and no deduction of profit from special business covered under section 80IA to 80RRB except 80JJAA.
3. Any set off of earlier business loss due to deduction’s mentioned in point no. 2 won’t be allowed.
4. Additional depreciation cannot be claimed by such company once they choose this section.
5. Once you apply for this section you cannot carry forward any loss referred to in point no. 3 above.
6. To get benefit/ opt for this section in first year you need to file return of income within due date mentioned in section 139(1) of Income Tax Act.

Important notes/ concerns:

• Any domestic company can take benefit of this section and it need not be a manufacturing company.
• Any company which in earlier years have taken benefit by not paying tax on profit from SEZ units (section 10AA) or by using provisions of section 80IA can take benefit of this section and once they opt for this section they can’t take benefit of this section in future.
• They can’t carry forward losses made due to the special sections but they can carry forward normal business loss.
• If any company has incurred any losses due to section 32AC they can carry forward the same as it’s not covered under clause (i) of sub section 2.
• Once you have opt in this section you can’t opt out of this section in future.

For the normal companies who are not manufacturing companies and who are not going to take any benefit of the sections mentioned above would benefit more by opting this section rather than going for traditional 25% tax rate for turnover below Rs. 400 crore as there is no turnover limit in this section and the tax rate is also less as compared to 25%.

You can read the whole ordinance here: //www.incometaxindia.gov.in/Lists/Latest%20News/Attachments/339/TheTaxation_Laws_Amendment_Ordinance_2019_20_9_19.pdf

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