COMPANY’S INCOME TAX PROVISIONS APPLICABLE FOR AUDIT OF F.Y. 2019-20 A.Y 2020-21

INCOME TAX Rates in case of Domestic Company

*The cap on turnover has been further increased in case of domestic companies from 250 crores to 400 crores by finance act 2019. Meaning there by, the domestic company whose turnover is more than 400 crores during F.Y. 2017-18 will be taxable at the rate of 30% and domestic companies whose turnover during F.Y. 2017-18 does not exceeds ₹ 400 crores will be taxable at the rate of 25%.  The two tax rates were existing before insertion of section 115BAA, i.e. 25% or 30% based on turnover. The above rates were subject to surcharge and cess @4% separately. 

Surcharge In case of Domestic Company:-

In case of Paragraph  E of Part III of Schedule I and 115BA

If total income > ₹ 1 Crore <= ₹ 10 crore:- 7%

If total income > ₹ 10 Crore:- 12%

In case of 115BAA, 115BAB

Sucharge @ 10% irrespective of any Income Criteria

115BA

Tax on income of certain manufacturing domestic companies

(1) Notwithstanding anything contained in this Act but subject to  other provisions of this chapterother than those mentioned under section 115BAA 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, 2017, shall, at the option of such person, be computed at the rate of twenty-five per cent, if the conditions contained in sub-section (2) are satisfied.

(2) For the purpose of subsection (1) the following conditions shall apply:                                                  

a) The company has been set-up and registered on or after 01.03.2016.

b) The company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to (or distribution of) such article or thing manufactured or produced by it.

c) The total income of company has been computed : -

1. Without claiming additional depreciation and deduction under sec.10AA, 32AC, 32AD, 33AB, 33ABA. 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB), 35AC, 35CCC, 35CCD and deduction under heading C under chapter VI-A except 80JJA.
2. Without adjusting brought forward loss from any earlier year (if such loss pertains to any deduction under the aforesaid sections).
3. Depreciation under section 32 except additional depreciation.

(3)  Moreover, such loss referred in clause(ii) will not be carried forward.

(4) Nothing contained in this section shall apply unless the option is exercised by the person in the Form 10-(IB) on or before the due date specified under sub-section (1) of section 139 for furnishing the first of the returns of income which the person is required to furnish under the provisions of this Act.

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.'

'Provided further that where the person exercises option under section 115BAA, the option under this section may be withdrawn.

115BAA

i.e 22% Tax Rate

 Analysis of provisions of Section 115BAA introduced as per The Taxation Laws (Amendment) Act, 2019 (the Act) dated December 12,  2019

The domestic company has to opt for such lower rate before the due date for filing the return of income [as per section 115BAA (5)]. The said rate of 22% is subject to some conditions that such domestic company should not claim following deductions and exemptions:-

Condition No 1115BAA(2)(i)

• Exemptions in relation to units in SEZ Sec  10AA
• Additional depreciation under Sec  32(1)(iia)
• Investments allowance under Sec 32AD
• Deduction under Sec 33ABA by making deposit towards site restoration fund or development account as per Sec 33AB.
• Deduction towards expenditure on Scientific Research under Sec 35.
• Deduction on capital expenditure on specified business as mentioned in Sec 35AD.
• Deduction for expenditure incurred on Agriculture Extention Project under Sec 35CCC or Skill development Project Sec 35CCD.
• Deduction under provisions of Chapter VIA under heading “C” (i.e. deduction in respect of certain incomes Sec.80HH to 80RRB except deduction under Sec 80JJA. But by finance Act 2020 has prohibited all deduction under chapter VIA except 80JJA and 80M and this amendment shall be applicable for A.Y. 2021-2022.

Condition No 2Section 115BAA(2)(ii)

The domestic company is not allowed to set off any loss carry forward or depreciation from earlier assessment year if such is attributable to deduction as referred above.Sec 115BAA(2)(ii). Therefore, domestic company shall not be allowed to claim set off of any brought forward losses appearing as closing balance in A.Y.18-19  on account of deductions and unabsorbed additional depreciation as mentioned in Sec 115BAA(2)(i).

Condition No 3Section 115BAA(2)(iii)

The domestic company is not allowed to set off any loss carry forward or unabsorbed depreciation deemed under section 72A if such is attributable to deduction as referred above.

Condition No 4Section 115BAA(2)(iv)

The domestic company is compulsorily to take depreciation under section 32 except additional depreciation.

Note 1: As per Sec 115BAA (3)

The brought forward loss and unabsorbed additional depreciation not set off in F.Y. 2019-2020 as referred in clause (ii) and (iii) of section 115BAA(2) ‘shall be deemed to have been allowed and no further deduction of such loss or depreciation shall be allowed in subsequent years.

Note 2: The Option once exercised, can’t be subsequent withdrawn and shall apply to all subsequent assessment year. (Second Proviso to Section 115BAA(5))

Note 3:  There is no limitation u/s 115BAA regarding the option to be exercised  from the year 2019-20(i.e the year of introduction of the section), therefore, if domestic Company wants to firstly set off brought forward losses pertaining to sections mentioned in conditions, then in that case the company can opt Sec 115BAA in subsequent years i.e. after the set of all brought forward losses.

Note 4:  The said rate of 22% is applicable to all domestic company without any limitation of turnover.

Note 5:There is no condition whether such company is engaged in manufacturing or specified business as specified u/s 115BA/115BAB.

Note 6: The company opting 115BAA cannot opt to pay tax under MAT. The same is as per corresponding amendment made in Sec 115JB (5A)(ii)

Note 7: The CBDT vide its circular no. 29/2019 vide dated 02-10-2019 has clarified that MAT Credit will not be allowed to those companies which opt for new tax rate 22% u/s 115BAA. Therefore, it depends upon case to case what is the quantum of available MAT credit.  It is advisable if MAT credit is in higher quantum then not to opt for lower rate of 22% as per section 115BAA. In those cases, the domestic company should pay tax @ 25% or 30% based on the turnover for FY 2017-18.

Note 8:  There is Flat Surcharge of 10% if a company opts for Sec 115BAA irrespective of the amount of Income earned by such company. The cess is same 4% and as such the effective tax rate is 25.17%.

Note 9:CBDT has issued a Notification No. 10/2020 dated 12-02-2020 and notified Form No. 10-IC for exercising the option for opting lower or concession rate of income tax by a domestic company under section 115BAA.

Note 10:The domestic company shall not be allowed to take additional depreciation during current F.Y or subsequent years once it opt for 115BAA.

Note 11:Thus, the concessional/enhanced  rates provided in the Chapter XII of Income Tax Act say section 111A (15%), section 112 (20%), 112A (10%), section 115BBE(78%) shall be applicable to the company as these sections fall under chapter XII only and the company will be allowed to pay tax at lower/higher rate in respect of such incomes.

Note 12:Provided that where there is a depreciationallowance in respect of a block of asset which has not been given full effect to prior to the 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.This is in respect of additional depreciation if not availed during F.Y. 2018-19 as the asset was purchased after 1^st October 2018 and additional depreciation was claimed at the rate of 10% and balance 10% was to be claimed in next F.Y. 2019-2020. Now, if a domestic company wants to opt for 115BAA than in that case the additional depreciation of 10% which was not claimed in F.Y. 2018-19 due to concept of 180 days in this case the WDV as existing on 01.04.2019 shall be reduced. 

Note 13Practically after introduction of section 115BAA the companies which have already opted 115BA will be at loss therefore second proviso was introduced in section 115BA(4) and where the option was given to company to  exercise option under section 115BAA, the option under section 115BA may be withdrawn. Therefore, now the companies earlier paying tax (26%/27.82%/29.12 under section 115BA) will pay tax (25.17) under section115BAA. 

Note 14:Comparison of Tax Effect under various options

The same can be understood with the help of following example: -

Option 1:   Normal tax rate 25% /30% based on turnover for FY 2017-18

No Surcharge up to Income ₹ 1 crores

Income is > 1 crore but < 10 crores surcharge is  7%

Income is > 10 crores surcharge is 12%.

Option 2:   Tax rate as per 115BAA 25.17%

Note: The above analysis are based on assumption that Income under Income Tax Act and Book Profits under Mat.

Butin the above example assessee is not allowed to take MAT credit under sec 115JAA which is as per circular no. 29/2019. Therefore, if opening MAT credit available with the company then in that case the company will have to forego such credit if the company wants to opt for 115BAA.  This will be a big loss because as per circular no. 29 dated 02-10-2019 the option once exercised cannot be withdrawn in subsequent year. Furthermore, from the above table if the assessee company opts for normal taxation, then in that case maximum MAT credit to be adjusted is 15.60% (31.20-15.60), working the Net Tax Rate as 15.60%  and the net  benefit available was 6.03% as per above Column E of Table 2, leading to benefit of 9.57% (i.e. 15.60%-6.03%) by staying in Normal Provisions as agsinst opting u/s 115BAA. The same is tabulated below:-

115BAB

Section 115BAB

A new domestic company will be eligible to opt for a lower tax rate of 15% (Plus Surcharge @ 10% and Cess @ 4%, making it an effective tax rate of 17.16%) if all of the following conditions as mentioned in section 115BAB(2) are cumulatively satisfied: –

1. Such company is incorporated on or after 1^st October, 2019 and the company has commenced the manufacture or production of an article or thing on or before 31st March, 2023.

2. The business of such company is not formed by splitting up or re-construction of a business already in existence except reestablishment or reconstruction or revival as referred in section 33B.

3. Such company does not use plant and machinery previously used for any purpose exceptimported second-hand machinery which was never used in India by any person and nor any depreciation has been claimed in respect of that imported machinery and this is as per explanation No 1. Similarly, as per explanation 2 there is another exception that if the value of the second hand machinery previously used in India is not more than 20% of the value of the total Plant & Machinery used by the company, the conditions have deemed to be complied by the company.

4. The company does not use any building previously used as a Hotel or Convention Centre and for which a deduction under Section 80ID has been allowed.

5.The company is not engaged in any other business other than:-

• Manufacture of an article or thing.
• Research in Research in relation to, or distribution such article or thing manufactured or produced by it.
• Distribution of such article or thing manufactured or produced by it.

Note :- Now a question arise whether company engaged in business of generation of power can be said to be covered under 115BAB as there has been dispute in past. According to author generation of power is covered and the same has been clarified by Finance bill 2020.

The Finance Minister has expanded the scope of Section 115BAB introduced in September, 2019 by allowing concessional rate of 15 per cent also for new companies incorporated on or after 1st October, 2019 and engaged in the generation of electricity. This amendment is being made retrospectively and accordingly shall be applicable from assessment year 2020-21.

6. The company is not engaged in the following businesses: –

• Software Development;
• Mining;
• Conversion of marble blocks or similar materials into slabs;
• Bottling of gas into cylinders;
• Printing of books;
• Production of cinematograph films; or
• Any other notified business (not notified till the date of writing this article)

7. The company does not claim any of the deductions/exemptions/benefits mentioned below in computing the total income for the purpose of income tax : –

• Tax Holiday for Units in Special Economic Zones (Sec 10AA)
• Additional Depreciation u/s 32((iia)
• Investment Linked deduction u/s 32AD
• Benefits u/s 33AB or 33ABA
• Accelerated R&D allowance (Clause (ii), (iia), (iii) of Sub Section (1), Sub Section (2AA) or Sub Section (2AB) of Section 35)
• Allowances u/s 35AD, 35CCC or 35CCD
• Deductions under Chapter VIA under the heading C except deduction for additional employment u/s 80JJAA. But by finance act 2020 has prohibited all deduction under chapter VIA except 80JJA and 80M and this amendment has been shall be applicable for A.Y. 2021-2022.
• The company is not allowed to set off any loss or unabsorbed depreciation deemed under section 72A if such loss or depreciation is attributable to deduction as referred above.

7) The company shall claim normal depreciation U/s 32 without claiming additional depreciation u/s 32(1)(iia).

8). The company informs the Income Tax Department of exercising such option to claim lower tax rate in the prescribe form on or before the due date of filing income tax return for the company for the first AY. Option once exercised can not be withdrawn. CBDT has issued a Notification No. 10/2020 dated 12-02-2020 and notified Form No. 10-ID for exercising the option for opting lower or concession rate of income tax by a domestic company under section 115BAA.

Meaning of Manufacture or Production for section 115BAB

Moreover, the word manufacture has been defined in the Income Tax Act 1961 under section 2(29BA) as follows: –

“manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing, -

 (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

 (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;

The word production has not been defined under the Act; however, it would be prudent to derive such meaning from the definition of ’manufacture’.

Anti Abuse Provisions under Section 15BAB

The anti abuse provisions are contained under sub-section (6) of Section 115BAB.

Such anti abuse provisions are divided into two categories: –

1. Related Party Transaction and transfer pricing adjustments

2. Taxability at higher rate

Related Party Transactions & Transfer Pricing

According to section 115BAB(6), where the assessing officer is satisfied that owing to the close connection with any person the transactions are so arranged, that they result in the company having greater profits that would otherwise accrue, AO may determine such profits on reasonable means.

In case such transactions are greater than the limit specified for domestic transfer pricing, such profits will be determined having regard to the arms length price for such transactions.

Hence transactions between companies claiming lower rate under this section and other group and related parties must be at arm’s length or reasonable basis and not in a manner to evade or reduce tax liability for the group as a whole.

Taxability at higher Income Tax rates

From the reading of the provisos to sub section (1) of section 115BAB, the following can be inferred: –

1. Adjustment to profits with related party transaction as mentioned in section 115BAB (6) will be taxed at 30% rate of income tax.(Second proviso to section 115BAB).

2. Any income derived from other business activities apart from manufacture or production of an any article or thing or research or distribution related thereto, shall be taxed at 22% rate of income tax, surcharge @ 10% and cess @ 4% and no deduction or allowance of any expenditure will be allowed against such income. Eg interest on FDR (First proviso to section 115BAB)

3. Short term capital gains on which depreciation is not allowable shall be taxable at 22% tax rate. (Third proviso to section 115BAB)

4. If in any previous year the conditions mentioned in this article, are not satisfied, on and from the AY relevant to such previous year, the option of lower tax rate shall cease to apply. (Fourth proviso to section 115BAB)

5. Thus, concessional rates say provided section 112 (20%), 112A (10%), 111A(15%) and higher rates u/s 115BBE (60%) shall be applicable to the company as these sections fall under chapter XII only and the company will be allowed to pay tax at lower rate in respect of such incomes.

NORMAL PROVISION AND 115BA/

115BAA/

115BAB

Comparison of Section 115BA, 115BAA and 115BAB and normal provision.