Section 115BAA of the Income Tax Act: A Guide to Lower Tax Rates for Eligible Domestic Companies

Section 115BAA of the Income Tax Act, 1961 is a provision that was introduced by the Finance Act, 2019, and came into effect from 1st April 2020. This section provides an option to domestic companies to pay income tax at a lower rate of 22% (plus applicable surcharge and cess) if they fulfill certain conditions.

Before we dive into the details of Section 115BAA, let’s understand the taxation system for companies in India.

Taxation of companies in India

In India, companies are taxed at a flat rate of 30% on their profits. However, if the turnover of a company is less than Rs. 250 crores in the previous financial year, then it is eligible for a lower tax rate of 25%. Additionally, surcharge and cess are also levied on the income tax payable by the company.

What is Section 115BAA?

Section 115BAA provides an option to domestic companies to pay income tax at a lower rate of 22% (plus applicable surcharge and cess) if they fulfill the following conditions:

1. The company must be a domestic company and not a partnership firm, an LLP, or any other type of entity.
2. The company must not have claimed any deduction under certain sections of the Income Tax Act, such as Section 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii), 35(2AA), 35AD, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, or 80-IE.
3. The company must commence its production or manufacture of goods on or before 31st March 2023.
4. The company must not be engaged in any business or activity that is not permitted under its Memorandum of Association or Articles of Association.
5. The company must not have any accumulated loss or unabsorbed depreciation as on 31st March of the previous year.
6. The company must not have any income from the following sources: (a) income from house property; (b) income from capital gains; (c) income from profits and gains of business or profession; (d) income from other sources.

Advantages of Section 115BAA

The main advantage of Section 115BAA is that it allows eligible domestic companies to pay a lower income tax rate of 22%, which is significantly lower than the regular tax rate of 30%. This can result in significant tax savings for such companies.

Additionally, companies can opt for this lower tax rate without having to forego any other tax benefits or deductions that they are already availing under the Income Tax Act.

Additional Conditions to be fulfilled by Companies under Section 115BAA:

Apart from the conditions mentioned in my previous response, there are a few additional conditions that a company must fulfill to opt for the lower tax rate under Section 115BAA. These include:

1. The company must file an intimation with the income tax department, indicating its intention to opt for the lower tax rate under Section 115BAA. This intimation must be filed before the due date of filing the income tax return for the relevant assessment year.
2. The company must not have any income from any source outside India.
3. The company must not have made any application for claiming a tax exemption or deduction or carried forward of any losses under the Income Tax Act.
4. The company must not be engaged in any business or activity referred to in Section 115BAB of the Income Tax Act.
5. The company must not have any investment in a business referred to in Section 115BAB of the Income Tax Act.
6. The company must not have any income from any business referred to in Section 115BAB of the Income Tax Act.

Advantages of Section 115BAA for Startups:

Section 115BAA can be particularly beneficial for startups in India, as they often struggle with high tax rates and limited financial resources. The lower tax rate of 22% under Section 115BAA can help startups save on their tax liability and reinvest the saved funds into their business.

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Moreover, startups often have limited access to tax incentives and deductions, as they may not have sufficient profits to utilize them. By opting for the lower tax rate under Section 115BAA, startups can save on their tax liability without having to forego any tax benefits or deductions that they are already availing.

In conclusion

Section 115BAA of the Income Tax Act provides a beneficial tax regime for eligible domestic companies in India. By fulfilling the prescribed conditions, companies can opt for a lower income tax rate of 22% and save on their tax liability. However, companies must carefully evaluate their eligibility and comply with all the conditions mentioned under the provision before opting for the lower tax rate.

Read more useful content:

• section 234e of income tax act
• section 286 of income tax act
• section 90a of income tax act
• section 40a(7) of income tax act
• section 226(3) of income tax act
• section 24 of income tax act

Frequently Asked Questions (FAQs)

Q. What is Section 115BAA of the Income Tax Act?

A. Section 115BAA of the Income Tax Act provides an option to domestic companies to pay income tax at a lower rate of 22% (plus applicable surcharge and cess) if they fulfill certain conditions.

Q. What are the conditions that a company must fulfill to opt for the lower tax rate under Section 115BAA?

A. The conditions that a company must fulfill to opt for the lower tax rate under Section 115BAA include being a domestic company, not claiming any deduction under certain sections of the Income Tax Act, commencing production or manufacture of goods on or before 31st March 2023, not being engaged in any business or activity which is not permitted under its Memorandum of Association or Articles of Association, not having any accumulated loss or unabsorbed depreciation as on 31st March of the previous year, and not having any income from certain sources.

Q. Is Section 115BAA applicable to all types of companies?

A. No, Section 115BAA is applicable only to domestic companies and not to any other type of entity, such as a partnership firm, an LLP, or any other type of entity.

Q. What is the benefit of opting for the lower tax rate under Section 115BAA?

A. The main benefit of opting for the lower tax rate under Section 115BAA is that eligible domestic companies can pay a lower income tax rate of 22%, which is significantly lower than the regular tax rate of 30%. This can result in significant tax savings for such companies.

Q. Can a company claim any other tax benefits or deductions if it opts for the lower tax rate under Section 115BAA?

A. Yes, a company can continue to claim any other tax benefits or deductions that it is already availing under the Income Tax Act, even if it opts for the lower tax rate under Section 115BAA.

Q. Is there any intimation or application required to be made by a company to opt for the lower tax rate under Section 115BAA?

A. Yes, a company must file an intimation with the income tax department, indicating its intention to opt for the lower tax rate under Section 115BAA. This intimation must be filed before the due date of filing the income tax return for the relevant assessment year.

Q. Can a startup in India opt for the lower tax rate under Section 115BAA?

A. Yes, startups in India can opt for the lower tax rate under Section 115BAA if they fulfill the prescribed conditions. This can be particularly beneficial for startups, as it can help them save on their tax liability and reinvest the saved funds into their business.