In order to give a boost to the Domestic Companies considering the global economic slowdown, provide relief to the Corporates as well as to promote the Make in India initiative encouraging new business entrepreneurs, the following two new sections have been introduced.
The Taxation Laws (Amendment) Ordinance, 2019 has reduced the Income Tax Rates and has introduced a New Tax System for existing Companies and new Domestic Manufacturing Companies from Financial Year 2019-2020
In this article we will learn about these newly inserted sections 115BAA and 115BAB with special focus on Eligibility Criteria, Tax Rates, Conditions to be satisfied and Consequence of failure to satisfy the conditions mentioned therein.
Note: Both these Sections are Not Applicable to Foreign Companies
Sec 115 BAA
Eligibility and Tax Rate
The option to opt for this section is applicable from Financial Year 2019-20 for All Domestic Companies irrespective of their activity.
It gives an option to the Domestic Company to pay Income Tax @ the rateof 22%. Additionally, Surcharge @ 10% of Tax and Education Cess @ 4% on Tax and Surcharge (irrespective of the Net Profit). Hence effective applicable tax rate is 25.168%%.
This option is available to all kinds of companies irrespective of their Turnover Limit, Year of Registration or whether engaged in any Manufacturing or not.
Conditions to be satisfied
Brought forward losses of previous years or previous company shall also be not allowed to be set off and carry forward once this Section is opted.
Minimum Alternate Tax Credit shall not be allowed to set off and the same will lapse.
So, a question may arise as to what should I do if I opt for this section and I will not be able to take the benefit of Accumulated Losses and MAT Credit?
Please note that there is no time limit as to when this option is to be taken by the Company. Thus, an existing company can postpone the option to take advantage of this Section and can do so after setting off of accumulated losses and unabsorbed depreciation.
Companies in the year in which it wishes to opt for this Section shall file Form 10IC electronically up to the Due Date of Return Filing
Once a Company opts for this Section, it can never be withdrawn.
Sec 115 BAB
Eligibility and Tax Rate
This new section applies to only Domestic Manufacturing Companies engaged in manufacture or production of an article or thing set up and registered on or after 1st October, 2019 and commence Manufacturing or Production of article or thing on or before 31/3/2023.
It provides an option to Domestic Manufacturing Companies to pay Tax @the rateof 15%. Additionally, Surcharge @ 10% of Tax as well as Health and Education Cess of 4% on Tax and Surcharge (irrespective of Net Profit). Hence, the effective applicable tax rate is 17.16%.
Conditions to be satisfied
1 The Company must be engaged in the Business of Manufacturing of Articles or Things Manufactured by the Company itself. The Company is also permitted to get into Distribution and Research of the articles which are manufactured by the Company.
2 The New Business shall not be formed by splitting up or reconstruction of existing Business except in extreme cases where the entire Manufacturing Business is destroyed by natural calamities like floods, earthquakes, etc or unforeseen circumstances like fire explosion, riots, etc and the same is revived within 3 years starting from the end of the year in which Business was destroyed as stated in Section 33B.
3 The Company shall not use any Hotel or Convention Centre which has been previously used on which deduction has been already claimed under Section 80ID.
4 Plant and Machinery used shall be new. However, 20% of Total Plant and Machinery can be second hand or used previously. Plant and Machinery imported from outside India which is not used in India and on which Depreciation has not been claimed previously is allowed and the same shall be considered as new Plant and Machinery.
5 Exceptions (Ineligible Businesses)
Companies which are engaged in the following Business shall not be given the benefit of this Section and have been specifically excluded. Thus, these Businesses will not be considered as Manufacture for the purpose of this Section 115BAB.
i Computer Software Development
iii Conversion of Marble Blocks or similar items into Slabs.
iv Bottling of Gas into cylinders.
v Printing of Books.
vi Production of Cinematic Films.
vii Any other Business notified by the Central Government.
Note: The Business of Generation of Electricity will be eligible for taking this option and it can take the benefit of lower Income Tax Rate under Section 115BAB.
The Company wanting to exercise this option shall up to the Due Date of filing of Return shall file Form 10ID electronically in the First Year itself. If the Company does not file this form, it will never ever get the benefit of paying Income Tax at a lower rate in future under this Section.
Note: If the Domestic Manufacturing Company opting Section 115BAB fails to satisfy any of the conditions mentioned above, then the Company shall not be eligible for the benefit of reduced tax rate of 15% during its lifetime. Further if it fails to comply with Conditions in Point 1&2 mentioned above the company shall also NOT be eligible to opt for 115BAA and will have to pay Income Tax at Regular Rates (i.e. However, if it fails to comply with Conditions in Point 3,4&5 mentioned above can still opt for 115BAA as explained above and pay Tax at 25.168%.
Common Conditions to be Satisfied for Both 115BAA and 115BAB
The Company exercising any of the above options shall not be eligible to claim following Deductions and Losses
Companies claiming Deduction in Special Economic Zone under 10AA,
Company claiming Additional Depreciation under 32(1)(iia),
Company claiming Investment Allowance for New Plant and Machinery in Notified Backward Areas under 32AD,
Companies claiming deduction with respect to manufacture and growing of Tea, Coffee, Rubber under 33AB,
Companies claiming deduction with respect to Prospecting or Extraction of Petroleum or Natural Gas or both under Sec 33ABA,
Companies engaged in any of the Specified Businesses (14 notified Businesses providing Investment Linked Deduction) under 35AD,
Companies claiming deduction of Scientific Expenditure Deduction under 35 (except Inhouse Capital and Revenue Research Expenditure),
Agricultural Extension Project under 35CCC,
Skill Development Project under 35CCD,
Deductions under Chapter VIA shall not be available (except under Section 80JJAA Deduction in respect of Employment of New Employees).
Once the option to pay Tax as per 115BAA or 115BAB is exercised it can never be withdrawn. If the Company fails to satisfy the conditions mentioned above then the option exercised would become invalid and normal provisions of the Act would apply assuming as if this section was not opted.
Some other Important Points for 115BAA and 115BAB.
- The above Tax Rate shall not be applicable to Income/Profits which are chargeable at Special Rates of Tax under Chapter XII of the Act.
For eg. Winnings from Lotteries, Horse Races will be charged at 30%, Long Term Capital Gains should be charged @ 20% or 10% as the case may be, etc.
- Surcharge of 10% and Health and Education Cess 4% is applicable irrespective of the Net Profit.
What about the Tax Rates for the Company if it is having Income other than Business Profit ?
The Income from other Heads of the Company which is not incidental to main business such as Income from House Property, Other Sources shall be taxed at the rate of 22% plus 10% and Education Cess @ 4% on Tax and Surcharge which comes to 25.168%. No deduction or allowance shall be allowed while computing such other Income of the Company. For example, the Standard deduction of 30% from House Property income shall not be allowed to companies opting for the above sections.
Additionally, Minimum Alternate Tax is not applicable to Companies opting for any of the above options.
Although the above options provide the Company to pay lower Income Tax still the decision to opt for the same, shall be taken after seeking clarifications, proper planning, detailed analysis, understanding the nuances as well as considering the implications especially keeping in mind, the fact that once any of these sections are opted it cannot be withdrawn. Nonetheless, it is an excellent opportunity for entrepreneurs to set up new manufacturing companies and avail the benefit of concessional rate of Tax. Sec 115BAB shall further help Manufacturing Companies to shift their Tax Base to India from other countries like China to take the benefit of lower Income Tax Rate.
-Article written by CA Susham Rambhia for Business Guru