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Provisions of Section 115BAA of the Income Tax Act

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For domestic enterprises, lower tax rates are permitted by Section 115BAA of the Income Tax Act. Since April 1, 2020, this clause, which was included in the Finance Act of 2019, has been in force. The government has implemented a reduced tax rate under Section 115BAA for domestic businesses that satisfy specific requirements to strengthen the local economy and promote investment in domestic businesses. Companies availing of other exemptions or deductions, such as those under the Start-up India scheme, will not be eligible for the reduced tax rate under Section 115BAA. We will go into the specifics of Section 115BAA in this post, including its eligibility requirements and tax rate for domestic businesses. We’ll also look at how this clause affects domestic businesses and their investors.
 
 
Did you know that the reduced tax rate under Section 115BAA of the Income Tax Act applies only to domestic companies that are not claiming any other exemptions or deductions under the Act? What is Section 115BAA of the Income Tax Act?
 
 
What is Section 115BAA?
Section 115BAA of the Income Tax Act is a provision that allows reduced tax rates for domestic companies. This provision was introduced in the Finance Act of 2019 and has been effective since April 1, 2020. The reduced tax rate under Section 115BAA applies to domestic companies that meet certain conditions. It has been introduced as part of the government’s efforts to boost the domestic economy and encourage investment in domestic companies.
Features of Section 115BAA of the Income Tax Act 
The reduced tax rate under Section 115BAA applies to domestic companies that meet certain conditions. It has been introduced as part of the government’s efforts to boost the local economy and encourage investment in domestic companies. The main features of Section 115BAA of the Income Tax Act are:  
Reduced Tax Rates for Domestic Companies
It allows for reduced tax rates for domestic companies that meet certain conditions. The reduced tax rate applies only to domestic companies that are not claiming any other exemptions or deductions under the Act. This means that companies availing of other exemptions or deductions, such as those under the Start-up India scheme, will not be eligible for the reduced tax rate under Section 115BAA. 
Income of the Domestic Company
The reduced tax rate under Section 115BAA applies to the total income of the domestic company, including income from business or profession and capital gains. This means that the reduced tax rate will apply to all sources of income of the domestic company, and not just a specific type of income. 
Two Financial Years
The reduced tax rate is applicable for the financial years 2020-21 and 2021-22. This means that domestic companies eligible for the reduced tax rate under Section 115BAA can avail of the reduced tax rate for two financial years. 
Lower Tax Rate
In comparison to the tax rates that were in effect under the previous tax system, the decreased tax rate under Section 115BAA is lower. For domestic businesses with a turnover or gross revenues of up to ₹400 crore in the previous year, the reduced tax rate is 22%; for businesses with a turnover or gross receipts of more than INR 400 crore in the prior year, the reduced tax rate is 15%. Compared to the former tax rate of 30% for domestic enterprises, these reduced tax rates are considerably lower.
Domestic Business
Domestic businesses that qualify for Section 115BAA’s reduced tax rate must adhere to the set guidelines for tax compliance. This involves submitting the necessary tax returns and making timely tax payments. If the tax compliance criteria are not met, the domestic company loses the benefit of the reduced tax rate under Section 115BAA. 
Condition for Section 115BAA Applicability 
The conditions for the applicability of the reduced tax rate under Section 115BAA of the Income Tax Act are: 
  • The domestic company must not be claiming any other exemptions or deductions under the Act. This means that companies availing of other exemptions or deductions, such as those under the Start-up India scheme, will not be eligible for the reduced tax rate under Section 115BAA. 
  • The domestic company must be engaged in a business or profession. It must have had a total turnover or gross receipts of up to INR 400 crore in the previous year.  
  • The domestic company must not be engaged in any business or profession that is specified in the negative list under Section 115BAA of the Act. The negative list includes businesses or professions such as legal services, engineering services, and architectural services. 
  • The domestic company must not be a producer of specified goods, such as cigarettes and tobacco products, or a provider of specified services, such as gambling and betting. 
  • The domestic company must have a total income that includes profits and gains from business or profession and capital gains. The reduced tax rate will apply to the total income of the domestic company, including income from business or profession and capital gains. 
  • The domestic company must follow the prescribed tax compliance requirements. This includes filing the required tax returns and paying taxes on time. Failure to comply with the tax compliance requirements will result in the domestic company losing the benefit of the reduced tax rate under Section 115BAA. 
Impact of Section 115BAA on Domestic Companies 
The introduction of this lower tax rate under Section 115BAA can have several positive impacts on domestic companies and their investors. 
Initial Impact
Firstly, the lower tax rate can result in significant savings for domestic companies, as it can reduce their tax liabilities and potentially increase their profits. This can make the company more attractive to investors, as they would be able to earn higher returns on their investments. Additionally, the lower tax burden can also make it easier for domestic companies to invest in the latest technologies, equipment, and other capital expenditures. This can help boost productivity and competitiveness. 
The Other Impact
Secondly, the lower tax rate under Section 115BAA can make it easier for domestic companies to compete with foreign companies. This is because the lower tax rate can reduce the overall cost of doing business for domestic companies, making their products and services more competitive in the market. This can help domestic companies gain a larger share of the market and potentially expand into new markets. 
Third Impact
Thirdly, the lower tax rate under Section 115BAA can also encourage domestic companies to invest in research and development (R&D) activities. This is because R&D expenses are eligible for a 150% weighted deduction under the Income Tax Act, which means that companies can claim a higher deduction for these expenses. This can make it more financially viable for domestic companies to invest in R&D, which can help to drive innovation and improve the overall competitiveness of the Indian economy. 
Overall Impact
Overall, the introduction of the lower tax rate under Section 115BAA can have several positive impacts on domestic companies and their investors. It can result in lower tax liabilities, higher profits, and improved competitiveness. This can make the company more attractive to investors and help to drive economic growth and development in India. 
How Does Section 115BAA Affect the Tax Liability of Domestic Companies? 
Section 115BAA of the Indian Income Tax Act, 1961 relates to the tax rates for domestic companies. Under this section, domestic companies are subject to a lower tax rate of 25% on their taxable income, as long as they meet certain conditions. These conditions include not availing of any exemptions or incentives, and not carrying out any business other than manufacturing or producing articles or things. If a domestic company meets these conditions, it would be eligible for the lower tax rate of 25% under Section 115BAA. This can significantly reduce the company’s tax liability, as the previous standard tax rate for domestic companies was 30%. 
Conclusion 
In conclusion, Section 115BAA of the Indian Income Tax Act, 1961 provides for a lower tax rate of 25% for domestic companies that meet certain conditions. This can have several positive impacts on domestic companies and their investors, including lower tax liabilities, higher profits, and improved competitiveness. The lower tax rate under this section can make it easier for domestic companies to invest in new technologies and equipment, and to compete with foreign companies. This can help boost productivity and competitiveness and drive economic growth and development in India. 
 
Posted : 29/05/2023 12:24 am
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