Optional System of Income Tax For Corporates

Optional System of Income Tax For Corporates

“An option to corporates has been given to get taxed at reduced rates by foregoing certain deductions/Exemptions. This should benefit a lot of companies”

I. Preamble:

From Assessment year 2020-21, certain options have been given to domestic companies to get taxed at reduced rates and also get exempt from MAT in certain cases. However, the company will have to forego certain exemptions/deductions. Therefore a comparative analysis will have to be made by each company to evaluate which system shall be better. This analysis will also have to be made keeping in view the scenario for the next few years as well because once this option is exercised, it cannot be reverted back in the future.

II. Option under Section 115-BAA:

This option is available to all domestic companies whether it is a ‘Private’ or ‘Public’ company or ‘Listed’ or ‘Not Listed’ company. It is irrespective of Turnover and maybe doing any business.

The following benefits are available:

1) Reduced rate of Income Tax at 22%. However mandatory surcharge of 10% with health and education of cess of 4% on income tax and surcharge. Therefore the effective rate is 25.168%.

2) Minimum Alternative Tax (MAT) under section 115JB shall not be applicable.

The following Deductions/ Exemptions will have to be foregone:

1) Deduction for additional depreciation under section 32(1)(iia) which is available to manufacturing companies for the addition of plant and machinery

2) Deduction under section 10AA. That is the deduction for profits of eligible SEZ undertaking

3) Deduction under section 32AD, 33AB, 33ABA,

4) Deduction under section 35((1)((ii)/(ii)/(iia), 35(2AA)/(2B), 35AD,35CCC, 35CCD

5) Deductions from Gross total income i.e 80(C) to 80(U). (However deduction for 80G, 80GGA, 80GGB, 80JJAA, 80LA & 80M are available for Assessment year 2020-21 and from Assessment year 2021- 22, the deduction for 80JJAA, 80LA & 80M are available.)

6) Brought forward losses and unabsorbed depreciation due to the above deductions being not allowable. Therefore normal losses and depreciation will be allowed to be set off during the year and carried forward also

7) Carried forward MAT Credit will have to be foregone. This has also been clarified by the CBDT circular 29/2019.

The following other important points may be noted:

1) The exemption can be availed starting from AY 2020-21 or even in the subsequent year

2) The exemption once availed, it has to be continued in future years and cannot be withdrawn.

3) Form 10-IC will have to be filed online before the due date of filing the return under section 139(1).

III. Conclusion:

There are other options also available under section 115BA or 115BAB but these are for manufacturing companies and not being discussed here. The option under Section 115BAA should be a good option for companies who are paying Tax especially due to MAT since they have a lot of depreciation available under income tax but less provided in books. Further many times less tax is being paid for capital gains but more under MAT. The company must evaluate this option which is beneficial since under normal circumstances, where turnover is less than Rs. 400 crore in the financial year 2017-18, the minimum effective rate is 26% and if profit is between 1 crore to 10 crore, then the effective rate is 27.82%. Moreover, the advantage is MAT shall not be applicable.

Disclaimer:

(These are authors’ personal views for educational purposes and the reader is advised to consult his Consultant/Adviser in case of any clarification or further guidance. No portion of this article can be quoted or reproduced or used in any manner for any purpose without the permission of the author. No responsibility can be attributed to the author in any manner.)