The Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019 has inserted Section 115BAB as a special provision for the taxation of new domestic companies. The section allows domestic companies incorporated on or after 1 October 2019 to pay tax at a concessional rate of 15% (plus applicable surcharge and cess) on their total income.
This provision was introduced with the aim of boosting investment and economic growth in the country by encouraging the formation of new companies. The concessional tax rate is available only to companies that satisfy certain conditions and requirements, which we will discuss in detail below.
Conditions for Applicability of Section 115BABA
To be eligible for the concessional tax rate under Section 115BABA, a company must satisfy the following conditions:
- It must be a domestic company that has been incorporated on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2024.
- It must not have been formed by the splitting up or reconstruction of an existing business or entity, except in case of a business re-established under section 33B.
- Does not use any machinery or plant previously used for any purpose.
Where a person, uses machinery or plant previously used and the total value of such does exceeds 20% of the total value of plant or machinery used by the company, the condition specified therein shall be deemed to have been complied with. - Does not use any building previously used as a hotel or a convention centre, as the case may be, in respect of which deduction under section 80-ID has been claimed and allowed.
- It must not claim any deduction or allowance under Section 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB), 35AD, 35CCC, 35CCD or Under any provision of Chapter VI-A.
- Company Cannot Setoff any loss carried forward from any earlier AY and no further deduction for such loss shall be allowed for any subsequent year.
If a company satisfies all the above conditions, it can opt to be taxed under Section 115BAB. If a company opts to be taxed under Section 115BAB, it will be required to pay tax at a concessional rate of 15% (plus applicable surcharge and cess) on its total income. This is significantly lower than the regular corporate tax rate, which is currently 22% (plus applicable surcharge and cess) for companies not claiming any deductions or exemptions.
Companies that opt to be taxed under Section 115BAB must carefully weigh the benefits of the concessional tax rate against the loss of other deductions and exemptions that they may be eligible for.
Conclusion
Section 115BAB of the Income Tax Act provides a concessional tax rate of 15% to new domestic companies that meet certain conditions and requirements. While this provision can be beneficial for companies in the manufacturing and production sectors, they must carefully consider the trade-off between the lower tax rate and the loss of other deductions and exemptions before opting for it. Companies that are eligible for Section 115BAB should consult with their tax advisors to determine whether it is the best option for them.