New Tax Regime for Domestic Companies: Section 115BAA of Income Tax Act

The Indian Government introduced section 115BAA on the 20th of September 2019 through the Taxation Amendment Ordinance 2019 with the objective of allowing domestic companies with lower tax rates. Under this section, the domestic companies are given an option to pay tax at the rate of 22% (instead of 25% or 30%). However, the concessional tax rate is subject to certain conditions as specified in the section. One of the most important aspects of section 115BAA is that Minimum Alternate Tax (MAT) @15% will not be applicable on the companies opting for lower tax rate u/s 115BAA.

In this article, we will understand the provisions of section 115BAA of the Income Tax Act and go through the conditions to be fulfilled to get benefit of lower tax rate regime.

Section 115BAA (1)

"Notwithstanding anything contained in this Act but subject to the provisions of this Chapter (Chapter XII), 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 22%, if the conditions contained in sub-section (2) are satisfied:"

Analysis

• Section 115BAA overrides the provisions of the Income Tax Act as well as section 115BA & section 115BAB except the other provisions of Chapter XII of the Act. It is important to note that both section 115BA & section 115BAB relates to concessional income tax rates for companies.
• Chapter-XII contains special rates of income tax in case of certain transactions. Let's see few of such transactions:

• A reading of the above provision makes it clear that the special tax rates contained for various transactions in Chapter XII shall continue to be applicable on a company opting for new tax regime under section 115BAA. It is also obvious that once a company has opted for concessional tax rate u/s 115BAA, it can not opt for concessional tax rate under similar sections 115BA or 115BAB.

Now, we will answer few questions based on the above reading:

Can a foreign company take benefit of lower tax rate under section 115BAA?

The benefit of concessional tax rates under section 115BAA can be availed by domestic companies only. Foreign companies are not eligible under section 115BAA.

What is the effective date of applicability of the provisions of section 115BAA?

The benefit of concessional tax rate under section 115BAA shall be allowed to the domestic companies for F.Y. 2019-20 (A.Y. 2020-21) and onwards. It is at discretion of the company to opt for section 115BAA.

What is the tax rate under section 115BAA?

If a domestic company opts for section 115BAA, the applicable tax rate will be 22% plus surcharge @ 10% plus 4% cess. Thus, the effective tax rate will be 25.168%

Is MAT applicable on a company opting for section 115BAA?

Section 115JB (5A) of the Income Tax Act provides that the provisions of minimum alternate tax (MAT) shall not apply to a person who has exercised the option referred to under section 115BAA or section 115BAB.

Who cannot opt for section 115BAA?

The following persons cannot opt for a concessional tax rate under section 115BAA:

• Partnership Firm
• Foreign Companies
• Individuals
• Hindu Undivided Family
• Cooperative Societies
• Association of Persons/ Body of Individuals

What is Form No. 10-IC?

• Referring Rule 21AE of the Income Tax Rules, the benefit of concessional tax rate u/s 115BAA can be taken only by furnishing Form No. 10-IC. 
• Form No. 10-IC is required to be furnished on or before the due date of furnishing the return of income u/s 139(1) for any previous year relevant to assessment year commencing on or after 01-04-2020.
• Option once exercised under section 115BAA shall apply to subsequent assessment years.
• Form No. 10-IC shall be furnished electronically on the Income tax portal under digital signature or electronic verification code.
• The Principal Director General of Income Tax (Systems) or the Director General of Income Tax (Systems) is the authority responsible for specifying necessary procedure for filing of Form No. 10-IC

Proviso to Section 115BAA (1)

"Provided that where the person fails to satisfy the conditions contained in sub-section (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and subsequent assessment years and other provisions of the Act shall apply, as if the option had not been exercised for the assessment year relevant to that previous years and subsequent assessment years."

Analysis

• Sub section (2) of Section 115BAA prescribes certain conditions to be complied by the domestic company which is opting for concessional tax regime u/s 115BAA.
• Proviso to Section 115BAA (1) states that in case the company fails to comply with those conditions in any previous year, the option shall be treated as invalid for the relevant assessment year as well as subsequent assessment years and the income of such defaulting company shall be assessed as if that company has not exercised option for concessional tax rate for that assessment year and subsequent assessment years.

Conditions for opting concessional tax regime u/s 115BAA

As stated by sub-section (1) to section 115BAA, a domestic company can opt for concessional tax regime u/s 115BAA subject to specified conditions as per sub-section (2) to section 115BAA. So, let's have a look of section 115BAA (2):

Section 115BAA (2)

"For the purposes of sub-section (1), the total income of the company shall be 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-section (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 other than the provisions of section 80JJAA or section 80M;

(ii) Without set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i);

(iii) Without set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A, if such loss or depreciation is attributable to any of the deductions referred to in clause (i); and

(iv) By claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed."

Analysis

A domestic company will have to forego following deductions or exemptions if it opts for concessional tax regime u/s 115BAA:

Section 115BAA (3)

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

Analysis

In simple words, where a company opts for section 115BAA, the losses or unabsorbed depreciation for earlier years which relates to ineligible deductions under section 115BAA (2) shall lapse and the company can not claim such losses or depreciation in subsequent years.

There is a big confusion amongst taxpayers that the entire carry forward losses and depreciation will cease to be deductible. It is clarified there is no restriction in carry forward & set off of losses or depreciation for a company opting for section 115BAA. Only restriction is in respect of items ineligible as per section 115BAA (2).

Set off of Losses and Unabsorbed Depreciation for companies opting section 115BAA

Section 115BAA (2) prescribes the conditions to be fulfilled if a company opts for concessional tax rates u/s 115BAA. The condition so prescribed is as follows:

"For the purposes of sub-section (1), the total income of the company shall be 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-section (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 other than the provisions of section 80JJAA or section 80M;

No additional depreciation allowed

The reading of the above provision makes it clear that if a company opts for section 115BAA, its total income shall be computed without considering depreciation u/s 32(1) (iia) which relates to additional depreciation. This can be so interpreted that a company opting for section 115BAA cannot claim additional depreciation in respect of its plant & machinery at the prescribed rates of 20% or 35%. But it will not have any impact on the claim for normal depreciation in respect of the assets of the company.

Moving ahead to clause (ii) of section 115BAA (2)

(ii) Without set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i);

The clause (ii) of the section 115BAA (2) expressly provides that where a company opts for section 115BAA, it shall compute its total income without set off of any loss carried forward or unabsorbed depreciation from any earlier assessment year. But it is not the case that the entire brought forward losses or unabsorbed depreciation is disallowed if a company opts for section 115BAA.

The words "attributable to any of the deductions referred to in clause (i)" indicates that only that portion of carry forward losses or depreciation shall be disallowed while calculating total income u/s 115BAA which relates to restricted items as prescribed under clause (i) of section 115BAA (2). Therefore, a company is allowed to carry forward losses & depreciation relating to items which are not mentioned in clause (i) of section 115BAA (2).

The intention of the law behind the clause (ii) is that when a particular deduction is not allowed in concessional tax regime, then any carry forward losses relating to such deduction shall also be treated as lapsed and the company should be barred from taking the benefits of set off of losses attributable to such deductions in the future. For example, if claim for additional depreciation is not allowed under section 115BAA, any unabsorbed depreciation or losses associated to additional depreciation in earlier years shall also be disallowed.

Thus, the company opting for section 115BAA will be required to make proper analysis of its brought forward losses and unabsorbed depreciation of earlier years and bifurcate it in accordance with clause (i) of the section 115BAA (2) and should utilize only that part which is not barred by clause (i).

Clause (iii) of section 115BAA (2) is similar to clause (ii) and deals with set off of carry forward losses or absorbed depreciation in the cases of amalgamation or demerger as per section 72A.

Now we shall move to sub-section 3 of section 115BAA

Section 115BAA (3)

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

We have already discussed that if a company opts for section 115BAA, it will compute its total income without taking into consideration specified deductions. Further, if any brought forward losses or depreciation are attributable to such specified deductions, such loss or depreciation shall also be ignored.

Sub-section (3) to section 115BAA further clarifies the above fact by stating that once a company opts for section 115BAA, the brought forward losses or depreciation relating to such specified or ineligible deductions u/s 115BAA shall be deemed to have been allowed and shall not be allowed in any subsequent year.

Therefore, if a company opts for section 115BAA, the brought forward losses/ depreciation relating to specified deductions shall cease and the company will not be able to claim any deductions thereof in future.

It is also important to read proviso to sub-section (3) to section 115BAA which is as follows:

"Provided that where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to assessment year beginning on the 1st day of April, 2020, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020."

We have already discussed that section 115BAA restricts the claim for additional depreciation u/s 32(1) (iia). However, there is no restriction on the claim of normal depreciation. Further, sub-section (3) of section 115BAA makes it clear that if a company opts for section 115BAA, the brought forward losses relating to restricted deductions & unabsorbed additional depreciation shall be deemed to have been allowed and the company can not claim it in subsequent years.

However, the proviso to section 115BAA (3) provides that a domestic company having unabsorbed depreciation shall make corresponding adjustment to the WDV of such block of assets as on 1st April 2019 in the prescribed manner in case the company exercises option under section 115BAA.

In simple words, the brought forward losses relating to restricted deductions shall lapse in case a company opts for section 115BAA for P.Y. 2019-20 (A.Y. 2020-21). But Proviso to section 115BAA (3) calls for adjustment of Losses or unabsorbed depreciation relating to additional depreciation to the opening WDV of block of asset as on 01-04-2019. It means that the balance of losses/ unabsorbed depreciation (relating to additional depreciation) shall be added back to the WDV of the block of asset as on 01-04-2019 and depreciation in future shall be computed accordingly.

It is also important to note that the benefit of adjustment to WDV of assets as on 10-04-2019 is specifically allowed only in respect of A.Y. 2020-21 only. Therefore, if a company exercises option u/s 115BAA in any assessment year after AY 2020-21, it shall not be allowed to add back losses or unabsorbed depreciation relating to additional depreciation to WDV of the block of assets.

Thus, 2 important points comes out of the above discussion:

• There is no timeline for a company to opt for section 115BAA. The option can be exercised by the company in A.Y. 2020-21 or afterwards.
• If a company opts for section 115BAA: In A.Y. 2020-21: Brought Forward Losses or unabsorbed depreciation relating to additional depreciation shall be added to WDV of block of assets as on 01-04-2019. In A.Y. 2021-22 or onwards: Brought Forward Losses or unabsorbed depreciation relating to additional depreciation shall not be added to WDV of block of assets.

The CBDT has also issued Notification No. 82/2020 dated 1st October 2020 to give effect to the provisions of section 115BAA.

Author' Note: In our opinion, the above discrimination has been intentionally done in the law to encourage the existing companies to opt the concessional tax regime in the first year of its operation i.e. A.Y. 2020-21 itself. In subsequent years, the choice to opt or not opt for section 115BAA should be guided by the quantum of additional depreciation lying yet to be availed by the company. Since section 115BAA restricts set-off of unabsorbed additional depreciation, hence, such a company may defer the option to exercise section 115BAA and wait till such unabsorbed additional depreciation are fully exhausted.

Availability of deduction u/s 80LA

Section 115BAA (4)

"In case of a person, having a Unit in the International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, which has exercise option under sub-section (5), the conditions in sub-section (2) shall be modified to the extent that the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in the said section."

Analysis

If a domestic company opts for section 115BAA, it is not allowed to avail deductions under Chapter VIA while computing its total income. Only exceptions given by section 115BAA (2) are deduction under section 80JJAA & 80M.

Section 80LA of the Income Tax Act allows a deduction equal to 100% to a Unit in the IFSC in respect of income as specified in the sub-section (2) of the said section. In case a Unit in the IFSC opts for deduction u/s 115BAA, it will have to give up the benefit of deduction u/s 80LA in accordance with section 115BAA (2). Here comes sub-section (4) of section 115BAA in lights.

By virtue of section 115BAA (4), the Unit in IFSC opting for section 115BAA shall be allowed to take benefit of deduction u/s 80LA equal to 100% of its income for a consecutive period of 10 years out of first 15 years. Thus, a Unit in IFSC is can deduct the following while computing its total income:

• Deduction u/s 80JJAA
• Deduction u/s 80M
• Deduction u/s 80LA
• Normal Depreciation

Section 115BAA (5)

"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 the 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:

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

Analysis

• Sub-section (5) of section 115BAA states that the benefit of concessional tax rate can be availed only when the option has been exercised by a domestic company.
• As already discussed, the option is to be exercised on or before the due date of filing return as prescribed u/s 139(1) of the Act. Such option can be exercised by filing Form No. 10-IC.
• The most important thing to keep in mind is that the option once exercised cannot be withdrawn for the same as well as subsequent years.

Proviso to section 115BAA (5)

"Provided that in case of a person, where the option exercised by it under section 115BAB has been rendered invalid due o violation of conditions in sub-clause (ii) or sub-clause (iii) of clause (a), or clause (b) of sub-section (2) of said section, such person may exercise option under this section:"

Analysis

In case of a person, where the option exercised by it under section 115BAB has been rendered invalid due to violation of conditions contained in-

• Sub-clause (ii) relating to machinery or plant previously used for any purpose or sub-clause (iii) relating to building previously used as a hotel or convention centre of clause (a) of section 115BAB (2) or
• Clause (b) (relating to company engaged in any business other than the business of manufacture or production etc.) of section 115BAB (2)

Such person may exercise option under this section i.e. 115BAA.

In simple words, if a company had earlier exercised option u/s 115BAB and it became invalid to any of the reason as given above, it can now opt for section 115BAA. Rendering of option invalid under one section does not automatically disqualify the company for option under other section. We can also say that both sections 115BAB and section 115BAA has independent operations. We will have better understanding of the above proviso after discussing section 115BAB.

Provisions of section 115JAA not to apply on company exercising option u/s 115BAA [Section 115JAA (8)]

According to section 115JAA (8), in case a domestic company opts for section 115BAA, it shall not be allowed the benefit of carry forward of MAT credit. Therefore, once a company exercises option u/s 115BAA, the balance of unutilized MAT credit in its books of accounts shall lapse. This is in line with the other provision of the Act that the provisions of MAT are not applicable on a company exercising option u/s 115BAA. [Section 115JB(5A)]

If a domestic company has a balance of MAT credit in its books of accounts, it should make a proper analysis of the tax effect of losing MAT credit before it opts for section 115BAA. This is because of the fact that the option u/s 115BAA can be exercised by a company at anytime in its lifetime. So, the company can wait till the balance of MAT credit is utilized before opting section 115BAA. Also read Circular No. 29/2019 dated 02-10-2019