Section 115BAA: Provisions for Companies to Pay Tax at Lower Rates
Section 115BAA is a relatively new section inserted into the Income Tax Act by the Finance Act 2020. If exemptions and deductions are not claimed, then certain domestic companies or cooperative societies become eligible for paying taxes at a comparatively lower rate under section 115BAA of the income tax act. Such companies have to meet certain specified eligibility criteria rules to avail the benefits. This article provides a complete guide on section 115BAA, which has provisions for companies to pay tax at lower rates.
Eligible Companies under Section 115BAA
A domestic company must follow these to file the company’s ITR and pay taxes at relatively lower rates.
- Company is set up on or after the 1st of October 2019
- Not involved in any business that is involved in the use of a hotel, convention center, or exhibition center
- It has not availed any tax deductions or exemptions under the IT Act’s provisions, such as Â
- Deduction u/s 10AA available for units established in special economic zonesAdditional depreciation u/s 32(1) (iia)Claiming deductions for tea/coffee/rubber manufacturing companies a/c u/s 33ABDeposit of site restoration fund u/s 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in IndiaCapital expenditure for specified business u/s 35AD on scientific research or an amount paid to a university or research association or national laboratory, or IITExpenditure on agricultural extension project u/s 35CCCDeductions under chapter VI-A u/s 80C to 80U (exception- allowed under section 80JJAA and section 80LA)
- There is no restriction on entry based on turnover, as any new or existing company can migrate into this section at any point of tile
The set-off of any carry-forward or unabsorbed depreciation related to the above sections is not allowed, and once companies opt for a tax regime under section 115BAA, they cannot revoke the status in the same or any subsequent year.
Taxability of Companies under Section 115BAA
While corporate companies have to pay tax at the rate of 30%, the companies under the 115BAA regime are eligible to pay tax at 22%, provided they have not claimed any deductions or exemptions.
Along with 22% tax, an additional 10% surcharge and 4% CESS are also applicable. Combining all these together leads to an effective rate of 25.17%, which is still lower than 30% for domestic corporate companies. Companies do not have to pay any Minimum Alternate Tax (MAT) if they choose to pay tax under this section.
| Eligible Domestic Companies | Applicable Tax Rates |
| Turnover or gross revenue in the previous year is less than ₹ 400Cr | 25% |
| Domestic manufacturing companies paying tax as per section 115BA | 25% |
| Certain domestic companies paying tax as per section 115BAA | 22% |
| Company paying tax as per section 115BAB | 15% |
| Other domestic companies | 30% |
Effective Applicable Tax Rates for Domestic Companies
The effective applicable tax rates for domestic companies who opted to file taxes under section 115BAA will pay at the effective rates of
| Base Tax Rate | Surcharge | Cess | Effective Tax Rate |
| 22% | 10% | 4% | 22*1.1*1.04= 25.168% |
Comparison of effective rates with and without section 115BAA
| Total Income | Effective rate under section 115BAA (including surcharge and cess) | Effective tax rate for companies not opting for 115BAA (including surcharge and cess) |
| <₹ 1Cr | 25.17% | 26% |
| >₹ 1Cr to ₹ 10Cr | 25.17% | 27.82% |
| >₹ 10Cr | 25.17% | 29.12% |
Limitations for Companies under Section 115BAA
- Under this section, only domestic companies can pay tax at lower rates; not applicable to foreign companies
- If domestic companies wish to lower the taxable income, they cannot opt for exemptions and deductions
- Only limited companies can opt to pay taxes under this regime
- Companies that wish to opt out of this regime have to wait till the expiry of the tax holiday period
If domestic companies choose to pay tax at the concessional rate of 22% (excluding 10% surcharge and 4% education cess) have to file a form 10-IC under this section.
Get Started with TaxDunia
Switching to pay taxes under section 115BAA comes with a combination of pros and cons for companies. There are no deductions or exemptions available, but tax is charged at lower rates. Also, the withdrawal from the regime is not this easy; therefore, before switching to it, just examine all the scenarios attached to it.
Reach out to TaxDunia, we can help you decide what to do if you are looking to switch to this new regime. Our personalized approach will benefit your business positively and come with a plan that suits your business model the best.
