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Through the tax amendment ordinance 2019, the government of India made multiple alterations to the income tax act of 1961. One of those amendments was the first introduction to section 115baa of income tax rate act.

Using the pretext of section 115baa of income tax act, the government of India inaugurated a reduction in the rate of corporate tax for domestic or national companies of India. Moreover, the minimum alternate tax or MAT rate was reduced to 15 percent from 18.5 percent. Let us find out more about the 115baa of income tax act along with its applicability and implication below. 

The new tax rate for domestic and national companies: 115baa of income tax act

As previously mentioned, section 115baa of the income tax act was instigated to offer corporate tax benefits for Indian (national) companies. The ruling mentions that the Indian companies will be required to pay company tax at the rate of 22 percent per annum with an additional cess of 4 percent and a surcharge of 10 percent.

If these companies chose to pay tax under the 115baa of the income tax act, they won’t be required to pay any other taxes under any other alternate income tax act. The 115baa of income tax act became applicable from the financial year 2019 – 2020.

What will the applicability of 115baa of income tax act mean to the companies?

To pay tax under the 115baa of income tax act the domestic companies will have to fulfill some specific criteria. That means these companies won’t be able to make use of any other acts of income tax while they apply the 115baa of income tax act. Let us find out the particulars of this comparatively new ruling:

  1. If any Indian domestic company is willing to pay taxes under the 115baa of income tax act, then that particular company will not be able to ask for any other kind of incentives or deductions under the income tax act of India. Furthermore, these companies will have to calculate their total income in the absence of the following:
  2. Companies that have been established in special economic zones will not be able to claim any kind of deduction under section 10AA of the income tax act.
  3. The special depreciation under section 32 and the investment allowance under the 32AD of income tax act won’t be eligible even though the company is situated in the backward regions of states that includes West Bengal, Bihar, Andhra Pradesh, and Telangana.
  4. If the company is manufacturing tea, coffee, and rubber products the company won’t be able to claim any deductions under the 33AB of the income tax act.
  5. Any kind of deduction cannot be claimed under Section 35 AD which refers to the capital expenditure of specific businesses.
  6. The company cannot claim any benefits or deductions under section 35CCD for any skill development project simultaneously; they will not be eligible for the same under section 35CCC which relates to agricultural extension projects.
  1. If any company opts for the new tax rate under section 115baa of income tax act it will not be able to claim any set off for bearing losses.
  2. All the existing companies as well as new companies will be eligible to pay taxes under the section 115BAA of income tax act.
  3. There has not been any mention of any kind of restriction on the turnover of any domestic company under this act.
  4. Before filing the income tax returns the company will have to choose if they are willing to opt-in and pay taxes according to 115baa of income tax act or they will simply opt and file claims according to other rulings of the income tax act.

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Applicability and implication of section 115BAA act with example

Suppose a company named Max Ltd. was consolidated in the year 2001 – 2002. The company had purchased new types of machinery and a plant facility of Rs. 10 lakhs on 1st March 2020. The total turnover for the company for the year 2017 – 2018 was under 400 crore, therefore the company will need to pay taxes at the rate of 25 percent for the year 2020- 2021.

The net income of the company after permitting the depreciation with respect to the new plant and machinery is 20 lakhs. As for the financial year 2021- 2022, the company will have two options available – pay the tax as per the usual 25 percent tax rate or opt for the section 115baa of income tax act.

If there are domestic companies that are looking for ways to reduce taxes then section 115baa of income tax act can be quite helpful. The only prerogative of this ruling is that the companies will have to fulfil the specifically mentioned conditions in order to opt for this act. Nevertheless, these companies won’t be able to choose any other tax ruling and claim deduction and benefits on them while they opt for the 115baa of income tax act. Prevailing companies can always migrate to 115baa of income tax act at any point in time.

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