Section 115BAA – New Tax Regime for Domestic Companies in India

What is Section 115BAA of the Income Tax Act?

Section 115BAA is a special provision in the Indian Income Tax Act that allows domestic companies to pay a lower tax rate of 22% (plus surcharge and cess) if they give up certain tax benefits and deductions.

It was introduced through the Taxation Laws (Amendment) Act, 2019, with effect from the financial year 2019-20 (Assessment Year 2020-21).

The purpose of Section 115BAA was:

• To reduce the corporate tax burden on companies.
• To bring India’s corporate tax rates closer to international levels.
• To encourage both domestic and foreign investments.
• To simplify the tax regime by removing the complexity of multiple deductions.

Before this section, corporate tax rates in India were among the highest in the world, making it difficult for companies to compete globally. Section 115BAA aimed to change that.

Who Can Opt for Section 115BAA?

Section 115BAA is available only to domestic companies.

Eligibility criteria:

• The company should be incorporated in India and classified as a domestic company.
• There is no turnover limit – both small and large companies can opt.
• The option must be exercised in the prescribed form within the deadline.

Exclusions and special cases:

• This section is not available to LLPs, partnership firms, or foreign companies.
• If a company claims certain deductions (like SEZ deductions under Section 10AA, additional depreciation under Section 32(1)(iia), etc.), it cannot opt for 115BAA unless it gives them up.
• Once opted, the company cannot switch back to the old tax regime.

What is the Tax Rate Under Section 115BAA?

The base tax rate under Section 115BAA is 22%.

Surcharge and cess applicability:

• A 10% surcharge is applicable.
• A 4% health and education cess is added.

Effective tax rate calculation:

• Base tax: 22%
• Add surcharge: 2.2% (10% of 22%)
• Subtotal: 24.2%
• Add cess: 0.968% (4% of 24.2%)
• Effective tax rate = 25.168%

So, under Section 115BAA, the company pays an effective rate of 25.17% (rounded). This is lower than the earlier rates, which could go up to 30-35% for many companies.

What are the Conditions to Avail Section 115BAA?

Companies opting for Section 115BAA need to follow certain conditions.

Disallowances of exemptions and deductions:

If a company opts for Section 115BAA, it cannot claim:

• Additional depreciation under Section 32(1)(iia).
• Deductions under Section 10AA (SEZ units).
• Deductions under Section 35 (scientific research, skill development, etc.).
• Deductions under Chapter VI-A (except Section 80JJAA for employment generation).
• Set-off of carried forward MAT credit.

Impact on MAT (Minimum Alternate Tax):

• Companies opting for Section 115BAA are exempt from MAT provisions.
• MAT credit from earlier years cannot be used once this option is exercised.

These conditions are meant to simplify the tax structure and ensure that all companies opting for 115BAA pay a flat rate without adjustments.

How to Opt for Section 115BAA?

Filing procedure:

• The company must file Form 10-IC electronically with the Income Tax Department.
• The form should be filed before or along with the Income Tax Return (ITR).

Timeline for exercising the option:

• The option can be exercised anytime before the due date of filing the return for the relevant Assessment Year.
• Once exercised, it applies for all future years.

Once opted, can it be withdrawn?

• No, once the company opts for Section 115BAA, it cannot switch back to the old regime in later years.
• Therefore, companies must carefully evaluate before making the choice.

Benefits of Opting for Section 115BAA

1. Lower corporate tax rate: Effective tax reduced to 25.17%.
2. Simplified tax structure: No need to calculate multiple deductions and exemptions.
3. Attracting investments: Both domestic and global investors prefer a stable, lower-tax environment.
4. Certainty in tax planning: Companies know their exact tax liability without worrying about complex deductions.
5. Boost to economy: Helps businesses retain more profits, leading to expansion and job creation.

Limitations and Considerations

While Section 115BAA has benefits, it also comes with some limitations:

1. Loss of deductions and incentives: Companies in SEZs or those investing in R&D may lose valuable deductions.
2. MAT credit lapse: Any existing MAT credit cannot be used.
3. No flexibility: Once chosen, the option cannot be withdrawn.
4. Not suitable for all companies: Businesses with high deductions under the old regime may find the new regime costlier.

Therefore, companies should calculate tax liability under both regimes before making the decision.