Analysis of Section 115BAB – An opportunity or a challenge

“प्रजानामेवभूत्यर्थंसताभ्योबलिमग्रहीत्।

सहस्रगुणमुत्स्रष्टुमादत्तेहिरसंरविः॥“

Surya, the Sun, collects vapour from little drops of water. So does the King.

They give back copiously. They collect only for people’s wellbeing. [Verse 18, Sarga 1 Raghuvamsa by Kalidasa]

While believing that our economy will reap huge returns on this crucial tax amendment in due course of time and have a multi-fold beneficial outcome.

The rate cut has made India amongst the few Asian-Pacific nations which have the lowest tax rate and dreamland for the Industrialist to establish their manufacturing unit in purview to reduce their overall cost.

The introduction of Section 115BAA and Section 115BAB to the Act has given a option as well as challenge for the domestic companies for choosing tax rates available which is as follows:

*Includes applicable surcharge and cess

*Total Income shall have the same meaning as provided under section 5 of the Income Tax Act

*Gross Receipt/ Turnover shall have the same meaning as provided by the guidance note of the ICAI. Since the same has not been defined anywhere in the Act

We at INMACS through this newsletter attempts to bring out an analysis of the provision of section 115BAA inserted as a “NEW TAX REGIME” for domestic companies. We have tried to cover extensively all the aspects one need to consider while taking a decision between the appropriate option. We hope that our readers would find this informative and helpful.

ll domestic companies (excluding branch, Permanent Establishment of foreign companies, firms, LLP, partnership firms) shall have an option to pay income tax at the rate of 22% (plus applicable surcharge @ 10% and cess @ 4%).

Such companies will have to surrender the following exemptions/ deductions under the different provision of this act while calculating for the income chargeable to tax:

*Further, claiming a set-off of any loss carried forward from earlier years, if such losses were incurred in respect of the aforementioned deductions shall not be allowed to any future year and shall lapse in the year in which company opts for Sec-115BAA. 

**The Companies can claim revenue expenditure as a normal deduction and on capital Expenditure, the Company can avail normal depreciation.

Restriction Over Utilisation Of Previous Brought Forward Losses

Generally, a company is allowed to carry forward its loss under the head “Profits and Gains of Business or Profession” for the period of 8 (eight) assessment year immediately succeeding the year in which the loss is incurred. Such brought forward loss shall be eligible for set-off from the future business profits of the company. 

However, if any domestic company opts for taxation under section-115BAA then such domestic company opting for the New Tax Regime shall not be eligible to claim brought forward loss to the extent it pertains to the deductions/ exemption mentioned in the Table- 1 above. The balance assessed loss will be allowed to be carried forward and set off normally. The company needs to prudently analyse & evaluate whether the future benefit from surrendering such loss is beneficial or not over the benefits of the reduced tax rate. 

Moreover, loss relating to deduction under section 35(2AB), once disallowed in terms of aforesaid provisions, the assessee will be entitled to claim depreciation on the capital expenditure incurred on scientific research in the normal course.

If any domestic company opts for taxation under New Tax Regime and have any brought forward unabsorbed depreciation of previous assessment year attributable to deductions claimed u.s 32(1)(ii) as additional depreciation, then income computed for tax purpose of the relevant assessment year shall be computed by ignoring such additional depreciation remaining unabsorbed, for the assessment year in which the option has been exercised and future assessment years. The written down value for the purpose of calculating depreciation will also be modified by adding back such depreciation in the written down value (WDV). 

Hence, as per proviso to Section 115BAA(3) of the Act, if any additional depreciation as per Section 32(1)(iia) has not been given full effect by way of adjustment against income in the years prior to assessment year, prior to AY 2020-21, then such domestic companies will be allowed to make corresponding adjustment to the written down value of the block of assets as on 1 April 2019 provided such domestic companies opt for Section 115BAA of the Act for AY 2020-21 on or before the due date specified under Section 139(1) of the Act for furnishing the return of income.

Non Applicability Of Provisions Of Minimum Alternate Tax (Mat) Under Section-115jb

As per Section 115JB of the Act, provisions relating to MAT will not apply to those domestic companies which exercise option under Section 115BAA of the Act or Section 115BAB of the Act. 

Hence the balance lying in the account of MAT credit shall fully lapse if companies opt for payment of tax under new regime.

This has been clarified by way of CBDT vide circular 29/2019.

In nutshell, the companies shall no longer be liable to pay MAT based on Book Profits and entirely carried forward MAT credit shall also lapse. 

Hence, it will become matter of analysis with regard to choosing an appropriate tax rate from a carton of tax rates keeping in mind the brought forward losses, unabsorbed depreciation and MAT Credit balance. The companies will have to analyse the future projections and tax liability and arrive at a prudent decision.

The following illustration would help the reader to get more clarity over the above mentioned issues.
An XYZ Co. is domestic company which wants to opt taxation u/s 115BAA for the AY 2020-2021. The company has the following information in the return of income of the AY 2020-2021

Now let’s assume the following scenario for the AY 2020-2021

*Every Scenario further needs a detailed tax analysis from company future perspective as well on case to case basis as the situation may vary year to year. The option once exercised can not be changed in future years.

• domestic companies willing to be taxed under the section 115BAA will have to opt for this option before the due date of filing the income tax return of the assessment year.
• Once the option is exercised in a particular assessment year, it cannot be changed subsequently.
• Domestic companies having a tax-holiday period can opt for lower taxation after this exemption But once opted this option cannot be withdrawn.
• The option to be exercised in accordance with the provisions of sub-section (5) of section 115BAA by a person, being a domestic company, shall be in Form  No. 10-IC.
• The option in Form No. 10-IC shall be furnished electronically either under digital signature or electronic verification Code.
• The forms seek general details of the company along with a declaration that “the option once exercised for any previous year, cannot be subsequently withdrawn for the same or any other previous year ”

• There is no restriction for entities formed by restructuring/ use of old plant & machinery/ use of building earlier used as hotel or convention centre.
• This option of a lower tax rate is available to all Domestic Companies, subject to aforesaid There is no eligibility date regarding the incorporation of companies.

• We can offer assistance to determine whether opting for the new tax regime will be beneficial for the company or not.
• We can assist you in making fresh investment in India if you are an Foreign investor wanting to invest in growing economy and related tax advisory.
• We can help you with restructuring to help you optimise the benefit from the scheme.
• We can assist to with filing of income tax returns and other forms including tax Audit and other legal & compliance procedure under Income-tax Act, besides structuring and guiding on various business transactions to keep the tax liability to a minimum level, fully in accordance with law and Rules.
• We provide you with a legal & other statutory guidance in respect of your business compliance and tax planning, besides assessments and appeals.