Simplified Guide to Section 115BAB of Income Tax Act

What is Section 115BAB of Income Tax Act?

Section 115BAB of Income Tax Act is a special provision for domestic companies engaged in manufacturing or producing any article or thing. Under this provision, such companies can opt for a lower tax rate of 15% (plus surcharge and cess) if they meet certain conditions. Some of the conditions are: the company should be set up and registered on or after October 1, 2019; the company should not claim any deduction or exemption under other sections of the Act; the company should not have any income from specified businesses; and the company should exercise this option before filing its return of income for the relevant assessment year.

Which companies are covered U/S 115BAB?

Any Indian company that appeases the conditions specified by the different sections of the Income Tax Act can opt for and claim under section 115BAB of Income Tax Act 1961. Section 115BAb is effective from the assessment year 2020-21.

What is Eligibility Criteria U/S 115BAB?

To avail of the benefit of this section, a company has to satisfy certain conditions, which are as follows:

• The company should be set up and registered on or after October 1, 2019, and begin manufacturing on or before March 31, 2024. page no. 29 point no. 26
• The company should not be formed by splitting up or reconstructing an existing business, except in case of a business reorganization under section 33B.
• The company should not use any plant or machinery previously used for any purpose, except in the case of imported machinery or plant which has not been used in India before.
• The company should not use any building previously used as a hotel or a convention center, as defined in section 80-ID.
• The total income of the company should be computed without claiming any deduction under Chapter VI-A (except section 80JJAA & 80M) or section 10AA related to SEZ.
• The total income shall be computed without claiming deduction of additional depreciation U/s 32(1)(iia), deduction for Investment allowance U/s 32 AD, or deduction section 33AB Tea coffee rubber development a/c, or deduction U/s 33ABA Site restoration fund, deduction for expenditure made for scientific research under section 35, or deduction U/s 35CCD for Agriculture and skill development project,or deduction in respect of expenditure on specified business U/s 35AD Point no. 2 (c)
• The company should not claim any set-off of any loss and unabsorbed depreciation carried forward from any previous assessment year if such loss is allocated to any deduction under Chapter VI-A (except section 80JJAA) or section 10AA.
• The company should opt for this section by furnishing a prescribed form and the income return for the relevant assessment year. Once exercised, such an option cannot be withdrawn for subsequent assessment years.

What is tax liability U/S 115BAB?

The effective tax rate for the domestic company that opted for section 115BAb is 17.16%.
Break up for the new tax rate can be understood by the below flow chart:

What is the Applicability of Transfer Pricing Provisions?

• If a company makes more profit than usual because of a special deal with another entity or person, the assessing officer may not count this extra profit. The assessing officer will only consider the profit the company should generally make.
• If a business deal is between two related parties in India and falls under section 92BA of the Income Tax Act, the deal's profits will be settled to the arm’s-length price, i.e., based on the fair market price.