Concessional Income Tax Rate of 22% for Domestic Companies

[Source: www.taxmann.com]

Finance Minister Nirmala Sitharaman promulgated the Taxation Laws (Amendment) Ordinance, 2019 on 20 September 2019 to further reduce the corporate tax rate for companies not availing specified tax exemptions. The Ordinance was replaced by the Taxation Laws (Amendment) Act, 2019 (‘the Amendment Act’) on receiving the assent of the President on 11 December 2019 effective 20 September 2019.

New Section 115BAA – Concessional Tax Rate of 22% for Domestic Companies

As per section 115BAA introduced by the Amendment Act, any domestic company may opt for the concessional tax rate of 22% with a fixed surcharge of 10% and health and education cess of 4%. Thus, the effective tax rate for domestic companies under this section, once opted for shall be 25.17%. The reduced rate under this section is subject to the following key conditions:

• Companies would not be eligible to avail any tax deductions/exemptions as specified in the section
• No carry forward and set-off of unabsorbed depreciation in relation to specified tax incentives. Further, set-off of any loss or unabsorbed depreciation arising out of amalgamation u/s 72A is also not permitted where such a loss or depreciation is attributed to any of the specified tax incentives.
• Option for concessional tax rate will have to be exercised by the domestic company on or before the due date of filing of return of income under Section 139(1) of the assessment year 2020-21 or thereafter and such option once exercised, shall apply to all subsequent years.
• CBDT has clarified that a company opting for section 115BAA shall not be allowed to claim set-off of any brought forward depreciation on account of additional depreciation.

It may noted that the aforesaid conditions are required to be satisfied in the first year as well as each subsequent year in respect of which the benefit of reduced rate is claimed.

The provisions do not specify any limitation/condition on account of turnover, nature of business or date of incorporation for opting for the concessional tax rate. Accordingly, all existing as well as new domestic companies are eligible to avail this concessional rate of tax.

Needless to mention that the corporates are likely to be enticed to avail the benefits under this scheme and therefore deliberate and draw comparisons before making the irreversible choice of being taxed at the lower rate under this regime.

The section does not put any cap on the time period for exercising the option. Therefore, a company with substantial brought forward losses/unabsorbed depreciation relating to tax incentives not allowed under the new regime, may choose to continue to be taxed under the normal provisions of the Act and exhaust the brought forward losses/unabsorbed depreciation and opt for the concessional tax rate in future years.

Further, despite the condition of giving up certain exemptions/deductions for opting for the lower tax rate, there still remains a handful of tax deductions that a company would be entitled to under the new regime. For instance, the incentive linked with job creation i.e. deduction with respect to the cost of new employee u/s 80JJAA would still be available to such companies. The illustrative list of such other deductions/incentives is as under:

• Section 35 – Expenditure on scientific research except for the following payments:
  1. To research association or to a university, college or other institution to be used for scientific research [Section 35(1)(ii)]
  2. To any Indian company for scientific research [Section 35(1)(iia)]
  3. To research association or to a university, college or other institution to be used for social science and statistical research [Section 35(1)(iii)]
  4. To a National Laboratory, university, IIT or specified person to be used for scientific research under a programme approved by the prescribed authority [Section 35(2AA)]
  5. By way of expenditure on scientific research on in-house research and development facility by a company engaged in bio-technology business or manufacturing of products other than Eleventh Schedule [Section 35(2AB)]

In other words, revenue and capital (other than land) expenditure incurred on scientific research in relation to business of the company, can still be claimed as deduction under the new tax regime.

• Section 35ABA – Expenditure for obtaining right to use spectrum for telecommunication services
• Section 35ABB – Expenditure for obtaining license to operate telecommunication services
• Section 35CCA – Expenditure by way of payment to associations and institutions for carrying out rural development programmes
• Section 35D – Amortization of preliminary expenses on expansion of business
• Section 35DD – Amortization of expenditure in case of amalgamation or demerger
• Section 35DDA – Amortization of expenditure incurred under voluntary retirement scheme
• Section 35E – Deduction for expenditure on prospecting etc. for certain minerals

Further, with the proposed abolishment of Dividend Distribution Tax (‘DDT’) and taxing the dividend in the hands of shareholder under the Finance Bill, 2020, it has been proposed to allow deduction under section 80M to the corporate shareholders opting for the concessional tax rate. As per section 80M, in case of inter-corporate dividends, a deduction will be provided to the recipient corporate shareholder from the dividend income to the extent dividend is distributed by it.

Prior to insertion of Section 115BAA, there were broadly two tax rates applicable to domestic companies. Domestic companies having turnover less than INR 400 crores during the FY 2017-18 were liable to pay tax @25% plus surcharge and education cess as applicable (Category I). Further, domestic companies having turnover more than INR 400 crores were liable to pay tax @30% plus surcharge and education cess as applicable (Category II).

Below table shows net tax savings for a domestic company applying the reduced rate of 22% as compared to the existing rate of 25%/30%.

 No MAT for companies opting for section 115BAA-

As mentioned above, the provisions of section 115BAA do not allow companies to claim tax incentives/exemptions thereby reducing the gap between taxable income as per normal provisions of the Act and the book profits for MAT purposes. Therefore, doing away with the applicability of MAT on such companies is a consequential amendment rather than an added incentive. However, a company earning income other than income under the head Profit and Gains from Business and Profession in respect of which reduced tax rates have been prescribed in the Act (such as long term capital gain @ 10%) would benefit, i.e. they would not be liable to pay MAT.

Since provisions of MAT are not applicable, section 115JAA which deals with MAT credit would also not be applicable for a company opting for tax regime as per section 115BAA. Consequently, MAT credit possessed by companies who paid taxes on their book profits in the past would become a dead loss if they opt for the concessional tax regime. This may give rise to a potential challenge wherein if a company violates conditions under section 115BAA resulting in non-availability of concessional tax rates, it will not be able to utilize MAT credit even though it would be liable to pay tax under normal provisions i.e. at the rate of 25% or 30%.

Capital Gains taxable under Sections 111A, 112 and 112A

It is relevant to point out that sub-section (1) of both Section 115BAA and Section 115BAB states that “Notwithstanding anything contained in this Act but subject to the provisions of this chapter……”. It is to be noted that the total income of the company is taxable at the rate of 22% under Section 115BAA and at the rate of 15% under Section 115BAB, however, the same are subject to provisions of this chapter. Following concessional rates on capital gain fall under this chapter:

• Section 111A – Rate of 15% is prescribed in respect of STT paid short term capital gain
• Section 112 – Rate of 20% is prescribed in respect of long term capital gain tax rate after indexation
• Section 112A – Rate of 10% is prescribed on STT paid long term capital gain without indexation in respect of sale of equity/units of mutual funds post 01 April 2018

Accordingly, income by way of capital gain as mentioned above shall be chargeable at the appropriate rate prescribed under Sections 111A, 112 and 112A and not at the rate of 22% under Section 115BAA and 15% under Section 115BAB. However, tax on other short-term capital gains which is chargeable under the normal provisions and does not fall under this chapter will be governed by the provisions of Section 115BAA and Section 115BAB as the case may be.

A domestic company opting for concessional tax rate schemes prescribed under section 115BAA or section 115BAB, can exercise this option by electronically filing Form 10-IC or Form 10-ID respectively.