Income Tax Rate for Companies

In India, generally Corporate were liable to pay income tax at 30% plus applicable cess and surcharge. In year 2016, Central Government through Finance Act 2016 first time announced reduction in corporate tax rate. Through amendment by Finance Act 2016, Corporate Tax rate (Income Tax Rate for Companies) reduced to 29% from existing rate of 30%. Such reduction was limited to certain class of companies if the total turnover or gross receipts of the company in the previous year 2014-15 does not exceed INR 5 Crore. At a same time, reduced rate of corporate tax also announced for newly setup manufacturing unit at 25%.

By finance Act 2017, the rate of corporate (Income Tax Rate for Companies) tax further reduced to 25% if the total turnover or gross receipts of the previous year 2015-16 does not exceed INR 50 crore and for rest of the cases it shall be 30%. Through Finance Act 2017 rate was reduced by 4% and further turnover criteria also increased to 50 crore from existing 5 crore.  By Finance Act 2018, such turnover threshold limit further increased to 250 crore. It means corporate tax rate will be liable at 25% for FY 2018-19 if the total turnover or gross receipts of the previous year 2016-17 does not exceed 250 crore.

Through Finance Act 2019, reduced corporate tax benefit further extended to companies whose turnover does not exceeds from 400 crore in financial year 2017-18. Here it is clearly indicates that in each budget government has extended the benefit of reduced rate (Income Tax Rate for Companies) either by reducing from 30% to 29% and 25% or by increasing turnover criteria.  In 2019 on 20^th September 2019 central government brought Taxation (Amendment) Ordinance Act, 2019, which brought down corporate tax (Income Tax Rate for Companies) up to 15%.

By this ordinance, Section 115BAA and 115BAB has been inserted into income act 1961. Let’s understand Section 115BAA and 115BAB in detailed.

Analysis of Section 115BAA of Income Tax Act:

Section 115BAA has given an option to pay income tax (Income Tax Rate for Companies) at 22% however to pay tax at 22% certain exemption and deduction will not be allowed. It means that companies have been given an option to claim reduced rate of corporate tax if such companies don’t want to claim certain deductions and exemptions. Let’s understand what all exemptions, deductions and other benefits would not be available if companies want to pay income tax (Income Tax Rate for Companies) at 22%.

• Companies cannot claim any brought forward losses
• MAT Credit shall not be available

Following deductions shall not be allowed:

• Deduction u/s 10AA i.e. Units located in SEZ
• Deduction u/s 32(1)(iia) i.e. Additional Depreciation
• Deduction u/s 32AD: Additional investment in plant machinery in specified backward area
• Deduction u/s 33AB: Tea Development Account
• Deduction u/s 33ABA: Site Restoration Fund
• Deduction u/s 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB: Expenditure on Scientific Research
• Deduction u/s 35AD: Specified Business
• Deduction u/s 35CCC: Expenditure on Agricultural Extension Project
• Deduction u/s 35CCD: Expenditure incurred on Skill Development Project
• Deduction u/s 80H to 80TT

However deduction u/s 80JJAA (30% deduction on Employment of New Employees shall be allowed). Further unabsorbed depreciation can be allowed to carry forward.

Analysis of Section 115BAB of Income Tax Act:

Under section 115BAB companies are liable to pay corporate tax at just 15%. However to avail lower tax benefit (15%) companies are required to satisfies certain conditions which are as follows:

1. Company must be formed on or after 1 October 2019
2. Company is not formed by splitting up or through reconstruction of existing company
3. Company is not build up on a area which was previously used by hotel or conventional centre
4. Company must be engage in manufacturing and production however following activities will not be classified as manufacturing and production

• Development of computer software;
• Mining ;
• Conversion of marble blocks or similar items into slabs;
• Bottling of gas into cylinder;
• Printing of books or production of cinematographic film; or
• Any other notified by Central Govt.

Apart from above classified four conditions such companies cannot claim exemptions/deduction mentioned in section 115BAA including MAT Credit and Cary forward of losses.

Effective Corporate Tax Chart for assessment year 2020-21

Note: wherever we used word “income tax rate” or “corporate rate” we was talking about only Basic Income tax rate which does not includes applicable cess and surcharge hence effective rate of corporate tax may be more than that.