Section 115BAA of Income Tax Act: Eligibility, Implications, and Benefits

Section 115BAA of the Income Tax Act, 1961 is a relatively new provision that was introduced in the Finance Act, 2019. This provision allows certain companies to opt for a lower tax rate on their income, subject to certain conditions. In this blog, we will discuss the applicability of section 115BAA, its conditions and benefits.

What is Section 115BAA?

Section 115BAA is a provision that provides an option to domestic companies to pay tax at a lower rate of 22%, subject to certain conditions. This provision was introduced in the Finance Act, 2019, and it is applicable from the assessment year 2020-21 onwards.

Applicability of Section 115BAA

The option to avail of the benefit of section 115BAA is available only to domestic companies. The following companies are eligible to opt for the lower tax rate:

1. Companies that are not claiming any exemption or deduction under the Income Tax Act, except for the following: a. Deductions under section 80JJAA (for employment of new employees). b. Deductions under section 35 (for expenditure on scientific research). c. Deductions under section 10AA (for units in Special Economic Zones). d. Deductions for depreciation under section 32 (1)(iia), (iib) and (iic).
2. Companies that are not engaged in the business of generation or distribution of electricity.

Conditions for Availing Section 115BAA

In order to avail the benefit of section 115BAA, companies need to fulfill the following conditions:

1. The option to avail of the benefit of section 115BAA should be exercised on or before the due date of filing the income tax return for the relevant assessment year.
2. The company should not have any brought forward loss or unabsorbed depreciation as of the end of the previous year.
3. The company should not have any income from a business that is set up in an SEZ on or after 1 April 2020.

Benefits of Section 115BAA

The benefit of section 115BAA is that eligible companies can pay tax at a lower rate of 22%. This is a significant reduction from the earlier tax rate of 30%. Additionally, these companies will not be required to pay any Minimum Alternate Tax (MAT) under section 115JB of the Income Tax Act.

Eligibility Criteria for Section 115BAA

In order to be eligible to opt for section 115BAA, a company must be a domestic company, which means a company that is incorporated in India. The company must also satisfy the following conditions:

1. The company must not have any income from any sources other than its business operations. For instance, if the company earns rental income from a property it owns, it will not be eligible to opt for section 115BAA.
2. The company must not have any accumulated losses or unabsorbed depreciation as of the end of the previous year in which it wishes to opt for section 115BAA.
3. The company must not have any income from units set up in a Special Economic Zone (SEZ) on or after 1 April 2020.

If a company satisfies all these conditions, it can opt for section 115BAA and enjoy a lower tax rate of 22%.

Implications of Opting for Section 115BAA

Once a company has opted for section 115BAA, it cannot claim any other deductions or exemptions under the Income Tax Act. This means that the company cannot claim deductions under sections such as 80C, 80D, and 80G. The only deductions that are allowed are those specified in section 115BAA itself.

Furthermore, once a company has opted for section 115BAA, it cannot go back to the previous tax regime. It must continue to pay tax at the lower rate of 22% for all subsequent assessment years.

Another important point to note is that section 115BAA is not available to companies that are engaged in the business of generation or distribution of electricity. These companies continue to be taxed at the previous rate of 30%.

Benefits of Section 115BAA

One of the key benefits of section 115BAA is the lower tax rate. By paying tax at a lower rate of 22%, eligible companies can improve their profitability and cash flow. This is especially beneficial for small and medium-sized companies that may be struggling to stay afloat in a challenging business environment.

Another benefit of section 115BAA is the simplification of the tax regime. By eliminating the need for companies to claim various deductions and exemptions, section 115BAA reduces the compliance burden on companies. This allows companies to focus on their core business operations instead of spending time and resources on tax compliance.

Conclusion

Section 115BAA of the Income Tax Act, 1961, provides a lower tax rate to domestic companies subject to certain conditions. This provision was introduced in the Finance Act, 2019, and is applicable from the assessment year 2020-21 onwards. Companies need to fulfill the conditions specified in this provision to avail of the lower tax rate. By opting for section 115BAA, eligible companies can reduce their tax liability and improve their profitability.

Read more useful content:

• section 145 of income tax act
• section 10e of income tax act
• section 9 of the income tax act
• section 94b of income tax act
• section 206aa of income tax act

Frequently Asked Questions (FAQs)

1. What is section 115BAA of the Income Tax Act?

• Section 115BAA is a provision in the Income Tax Act that allows eligible domestic companies to pay tax at a lower rate of 22%.

2. Who can opt for section 115BAA?

• Domestic companies that do not have any income from sources other than their business operations, do not have any accumulated losses or unabsorbed depreciation, and do not have any income from units set up in a Special Economic Zone on or after 1 April 2020, can opt for section 115BAA.

3. What is the tax rate under section 115BAA?

• The tax rate under section 115BAA is 22%.

4. Can companies claim any deductions or exemptions under section 115BAA?

• No, companies cannot claim any deductions or exemptions under section 115BAA. The only deductions allowed are those specified in the section itself.

5. Can companies switch back to the previous tax regime once they have opted for section 115BAA?

• No, companies cannot switch back to the previous tax regime once they have opted for section 115BAA. They must continue to pay tax at the lower rate of 22% for all subsequent assessment years.

6. What is the benefit of opting for section 115BAA?

• The main benefit of opting for section 115BAA is the lower tax rate, which can improve a company’s profitability and cash flow. It also simplifies the tax regime by eliminating the need for companies to claim various deductions and exemptions.

7. Can companies engaged in the business of generation or distribution of electricity opt for section 115BAA?

• No, companies engaged in the business of generation or distribution of electricity cannot opt for section 115BAA. They continue to be taxed at the previous rate of 30%.

8. Is section 115BAA applicable to foreign companies?

• No, section 115BAA is applicable only to domestic companies.

9. Can companies that have incurred losses in the current year opt for section 115BAA?

• Yes, companies can opt for section 115BAA even if they have incurred losses in the current year, as long as they do not have any accumulated losses or unabsorbed depreciation.

10. How can companies opt for section 115BAA?

• Companies can opt for section 115BAA by filling out Form 10-IE and submitting it to the Income Tax Department. They must do so before the due date for filing the tax return for the relevant assessment year.