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BONANZA OR GIMMICK! - Analysis of Corporate Tax Rate, Tax Advisory by Aryan Consulting

Updated: Aug 20, 2023

Accounting Outsource Services
Corporate Tax

The Govt. of India, in the year 2019, offered reduced tax rate of 22% to domestic companies, subject to certain conditions. Here we do a simple layman reading of the provisions.

The Taxation Law (Amendment) Ordinance 2019 (the Ordinance) promulgated by the President of India on September 20, 2019, inserted a new provision, viz. Section 115BAA in the Income Tax Act (the Act) with effect from Assessment Year 2020-21, giving an option to a domestic company to pay Income Tax at a lower rate at 22% (plus surcharge and Cess, as applicable) for any assessment year, beginning from A.Y.2020-21, subject to certain conditions enumerated in sub-section (2) of Section 115BAA.

Is this a bonanza or a gimmick! The amusing thing is that, under the old scheme of things, domestic companies are liable to a 12% surcharge when income exceeds Rs 10 Crore. Whereas companies availing of the lower rate of tax of 22% have to compulsorily pay surcharge on income tax @ 10%. Let us look at this by way of a simple calculation:

Old Rate

Income Less Than Rs 10 Crore 25% + 4% Cess = 26%

Income Exceeding Rs 10 Crore 25% + 12% Surcharge + 4% Cess = 29.12%

New Rate

22% + 10% Sucharge + 4% Cess = 25.17%

In effect, smaller companies get an effective tax break of around 1% only, whereas bigger corporates get a tax benefit of almost 4%.

A closer look at the section reveals what we loose by opting for the taxation u/s 115BAA:

1. In case of a manufacturing industry, new plant and machinery are eligible for deduction of additional depreciation u/s 32(1)(iia). A company opting for reduced tax rate is not eligible to claim this benefit. For example, in case a new machinery is put to use during the year costing, say, Rs 30 Lakhs, additional depreciation @ 20% (assuming full year) would be Rs 6 Lakhs, deductible from the taxable income. This would be lost, therefore a tax benefit of Rs 1.50 Lakhs (under reduced rate) is gone.

2. Even the brought forward losses, if any, on account of additional depreciation is lost. Any such brought forward loss is to be added back to the written down value of the block of asset.

3. It may be argued that, the benefit of depreciation will be available in subsequent years, since additional depreciation is only an acceleration of the depreciation, however, the tax implication is immediate. Hence, companies looking for expansion or heavy investment in new machinery must carefully analyse the impact before jumping to adopt the new tax rate.

4. Any deduction available under Chapter VI of the Income Tax Act, like section 80G etc. are not available.

5. Tax on MAT u/s 115JB is not applicable to companies opting for the new tax regime. Accordingly, Circular No. 29 dated 02.10.2019, the CBDT has expressed the view that the tax credit of MAT paid by a domestic company exercising option under the newly inserted Section 115BAA of the Act shall not be available on the ground that the charging provisions of Section 115JB are itself not applicable to such a company.

6. There is no time line within which option under section 115BAA can be exercised, it may be noted that a domestic company having credit of MAT may, if so desire, exercise the option after utilising the said credit against the regular tax payable under the taxation regime existing prior to promulgation of the Ordinance.

7. The most important fact is that the option needs to be exercised by submission of an online form before the due date of filing of return or the actual filing of income tax return, whichever is earlier.

8. Once a company opts in favour of reduced taxation u/s 115BAA, it cannot revert or withdraw the said option.

Happy tax saving!

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