The introduction of Section 115BAA under the Income Tax Act, 1961 offered a lucrative flat tax rate for domestic companies in exchange for foregoing certain exemptions and deductions. However, a growing concern—almost a myth—has emerged: once a company opts for Section 115BAA, it's a one-way street with no return. Is this really the case? Let's delve into the legal provisions and break this down.
The Source of the Confusion
At the heart of the misunderstanding lies Sub-section (5) of Section 115BAA, particularly its second proviso, which states:
“...once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.”
This seems to imply a permanent lock-in. Even the Income Tax return filing utility reflects this stance by not permitting companies to revert to the normal tax regime or claim deductions under Chapter VI-A once the 115BAA option has been exercised.
A Closer Look at the Law
However, this provision is specifically applicable to companies that had earlier opted for Section 115BAB (meant for new manufacturing companies) and were later rendered ineligible due to violations of specific conditions. In such cases, the company may opt for Section 115BAA, but cannot opt out of it later.
The broader provision in Sub-section (1) of Section 115BAA offers a different perspective. It includes a key proviso:
“...if the company fails to satisfy the conditions in Sub-section (2) in any previous year, the option shall become invalid...and other provisions of the Act shall apply, as if the option had not been exercised.”
What This Means Practically
Sub-section (2) lists conditions such as:
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Not claiming deductions under Chapter VI-A (except Section 80JJAA and 80M),
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Not setting off certain carried forward losses or unabsorbed depreciation.
If a company violates any of these conditions, such as claiming a deduction under Section 80-IAC (available to recognized startups), the option under 115BAA becomes invalid from that year onwards, and the company transitions back to the normal tax regime.
An Example in Practice
Consider a startup company that opts for Section 115BAA in its first year. In the second year, it gets recognized as an eligible startup and claims a deduction under Section 80-IAC. Since this deduction falls under Chapter VI-A (which is restricted under 115BAA), the company is automatically disqualified from the concessional regime and reverts to paying tax at 25% (plus applicable surcharge and cess) under the normal provisions of the Act.
Final Thoughts
Contrary to the prevailing belief, opting for Section 115BAA is not a life sentence. Companies can exit this regime—not by voluntary withdrawal—but by violating any of the conditions under Sub-section (2) of 115BAA. The only exception is when a company transitions to 115BAA after being disqualified from 115BAB; in such a scenario, the company truly cannot opt out.
Conclusion
The law provides both flexibility and checks. The narrative that 115BAA is irreversible stems from a misreading of the second proviso to Sub-section (5), which applies in limited circumstances. Most companies can exit 115BAA through a legal technicality—just by claiming a deduction they become newly eligible for. This loophole, or design depending on perspective, ensures the regime isn't necessarily a financial prison sentence.
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