Information

In order to give a boost to the Indian economy and to promote corporatization, the government has introduced an all-new section namely Section 115BAA and Section 115BAB to the Income tax act, whereby the governments have declared the tax benefits to those manufacturers who runs the business by formulating company subject to certain terms and condition. The said sections have received welcoming responses all over the nation. By this step of the government, the environment of running the business in India is expected to be more transparent and legalize. Let us discuss these sections in detail in this article.

Section 115BAA:

Section 115BAA of the Income-tax act states that, a Domestic company whether Manufacturer or not, needs to pay income tax at the rate of 22% (plus surcharge and cess) from the F.Y 2019-20 if such company adhere to certain terms and condition as prescribed under the act. After adding a surcharge of 10% and access of 4%, the effective tax rate would be 25.17%. A company that opts to pay tax at the above rate is required to adhere to the following conditions.

Terms and conditions to be followed

Exemptions/Incentives Not Available to Companies Under Section 115BAA

Such companies should not avail any exemptions or incentives under different provisions of income tax. Thus, the entire income of such a corporation must be calculated without:

Deductions Not Allowed Under Specific Sections

• Deduction for Units in Special Economic Zones (Section 10AA): Claiming any deduction available for units established in special economic zones under section 10AA is not allowed.
• Additional Depreciation and Investment Allowance (Section 32 and 32AD): Companies cannot claim additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in selected backward areas of Andhra Pradesh, Bihar, Telangana, and West Bengal.
• Deduction for Tea, Coffee, and Rubber Manufacturing (Section 33AB): Companies engaged in these activities cannot claim deductions under section 33AB.
• Deduction for Site Restoration Fund (Section 33ABA): Companies engaged in extraction or production of petroleum or natural gas or both in India cannot claim deduction towards deposits made towards the site restoration fund under section 33ABA.
• Scientific Research Deduction (Section 35): Claiming a deduction for expenditure on scientific research or payments to a university, research association, National Laboratory, or IIT under section 35 is disallowed.
• Capital Expenditure Deduction (Section 35AD): No deduction is allowed for capital expenditure incurred by any specified business under section 35AD.
• Agriculture and Skill Development Projects (Section 35CCC and 35CCD): Deduction for expenditure incurred on agriculture extension projects under section 35CCC or skill development projects under section 35CCD is not allowed.

Chapter VI-A Deductions and Loss Set-Offs Not Permitted

• Chapter VI-A Deductions Except for Sections 80JJAA and 80M: Deductions allowed under section 80IA, 80IAB, 80IAC, 80IB, etc., are not allowed except for section 80JJAA and 80M.
• Loss Set-Offs: Companies cannot claim a set-off of any loss carried forward or depreciation from earlier years if such losses were incurred in respect of the aforementioned deductions.

Amalgamation and MAT Credits

• Set-Off of Losses in Amalgamation: An amalgamated company cannot set off carried forward loss or unabsorbed depreciation belonging to an amalgamating company if such loss or unabsorbed depreciation is on account of the above deductions. The normal depreciation, however, can be claimed.
• MAT Credits: Domestic companies opting for section 115BAA cannot claim MAT credits for taxes paid under MAT during the tax holiday period. The companies would be unable to decrease their tax liability under Section 115BAA by claiming MAT Credit.

Option to Pay Tax Under Section 115BAA

• Filing of Form 10-IC: The company must exercise the option to be taxed under section 115BAA on or before the due date of filing income tax returns, usually 30th September of the assessment year. For AY 2020-21, the due date stands extended to 30 November 2020. Once a corporation opts for section 115BAA in a given fiscal year, it cannot withdraw it later. The option should be exercised by filing Form 10-IC, as notified by the CBDT, and submitted online under a digital signature or an electronic verification code.
• No Restriction on Turnover: There is no restriction on turnover, and the company need not be a new company; any existing company can migrate into this section at any point.
• Time Limit for Choosing Lower Tax Rate: The government has not prescribed a time limit for domestic companies to choose a lower tax rate under section 115BAA. Companies can avail the benefit of section 115BAA after claiming the brought forward loss on account of additional depreciation and also utilizing the MAT credit against the regular tax payable if any.

Other benefits:

• Such companies will not be required to pay minimum alternate tax (MAT) under section 115JB of the act.

Section 115BAB:

The Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019 has inserted Section 115BAB offering a low tax rate of 15% (plus surcharge and cess) to new manufacturing companies. This means that the newly incorporated company engaged in manufacturing can avail the benefit of a lower tax rate subject to certain terms and conditions.

Let us see what are these terms and conditions:

1. The company must be domestic and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023. Such a company should:
2. Not be formed by the splitting up and reconstruction of a business already in existence except in case of a business re-established under section 33B
3. Does not use any plant or machinery previously used for any purpose. However, the company can use plant and machinery used outside India and used in India for the first time. Also, the company can use old plant and machinery, the value of which does not exceed 20% of the total value of the plant and machinery used by the company
4. Does not use a building previously used as a hotel or a convention center. ‘Hotel’ means a hotel of two-star, three-star, or four-star category as classified by the Central Government. ‘Convention center’ means a building of a prescribed area comprising of convention halls to be used to hold conferences and seminars, be of such size and number and having such other facilities and amenities, as may be prescribed.
5. The company should be engaged in the business of manufacture or production of any article or thing, and research concerning such article or thing. The company can also be engaged in the distribution of such articles or things manufactured or produced by it.
6. The total income of the company should be calculated without claiming tax exemptions and incentives as mentioned below:
7. Deduction under section 10AA for units in Special Economic Zone
8. Deduction for additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal
9. Deduction under section 33AB for tea, coffee, and rubber manufacturing companies
10. Deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
11. Deduction for expenditure made for scientific research under section 35
12. Deduction for the capital expenditure incurred by any specified business under section 35AD
13. Deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
14. Deduction under Chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB, and so on, except deduction under section 80JJAA
15. Set-off of any loss carried forward from earlier years if such losses were incurred in respect of the aforementioned deductions
16. Deduction for depreciation under section 32, except the additional depreciation as mentioned above

• A new manufacturing company can opt to be taxed under section 115BAB. The company has to exercise the option on or before the due date of filing income tax returns i.e usually 30th September of the assessment year. Once the company opts for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.
• The effective tax rate would be: 15% (tax) + 10% (surcharge) + 4% (cess)= 17.16%.

Conclusion

Since the government is providing such huge tax benefits we advise all our readers to think to transform their existing business into the company format as soon as possible. Those, who are thinking to start a new business, can definitely go for the company format of business and avail the maximum tax benefits.