Section 115BAA — New Corporate Tax Rate
Section 115BAA of the Income Tax Act, 1961 introduced a concessional corporate tax rate of 22% for domestic companies that chose to forgo specified deductions and incentives, effective from assessment year 2020-21 onwards.
Section 115BAA was inserted by the Taxation Laws (Amendment) Act, 2019, announced via an ordinance in September 2019. The provision allowed domestic companies to pay income tax at 22% (plus surcharge of 10% and applicable cess), making the effective tax rate approximately 25.17%. This was a significant reduction from the then-standard rate of 30%.
To avail this option, a domestic company had to satisfy specific conditions. It could not claim deductions under Chapter VI-A (other than Section 80JJAA for employment of new workers), deductions under Sections 10AA, 32AD, 33AB, 33ABA, 35(1)(ii), 35(1)(iia), 35(1)(iii), 35AD, or 35CCC. The company also could not set off accumulated losses or unabsorbed depreciation attributed to such deductions.
The option once exercised was permanent and irrevocable. A company had to file Form 10-IC on or before the due date for filing the return of income for the first year in which the option was exercised. This administrative requirement was strictly enforced, with courts initially declining to condone late filing, though later CBDT circulars provided some relief.
Section 115BAA effectively replaced the need for Minimum Alternate Tax (MAT) applicability for such companies, since once the 115BAA option was exercised, MAT under Section 115JB was no longer applicable. This was a relief for companies with large book profits but lower taxable profits.
The provision was particularly beneficial for highly profitable companies with few eligible deductions, as the lower base rate translated directly into tax savings. Companies in capital-intensive sectors that had exhausted accelerated depreciation benefits or whose deductions were minimal found this option attractive.
From a compliance perspective, the new regime simplified computation by eliminating the dual-track MAT comparison. However, companies needed to carefully model their deduction profiles before making the irrevocable election, since forgoing future deductions like Section 80-IC (for hilly area units) or accelerated depreciation in early-stage manufacturing setups could result in higher absolute tax outflows if the company was in an investment phase.