Understanding Section 115BAD of the Income Tax Act: Tax on Income of Certain Resident Co-operative Societies

Section 115BAD of the Income Tax Act, introduced by the Finance Act, 2020, offers a concessional tax regime for eligible resident co-operative societies in India. This provision allows them to pay income tax at a lower rate of 22% under specified conditions, providing a significant incentive to simplify tax compliance and reduce the tax burden. In this comprehensive guide, we will explore the key aspects of Section 115BAD, including eligibility, conditions, and the computation of total income.

What is Section 115BAD?

Section 115BAD provides an option for resident co-operative societies to be taxed at a concessional rate of 22% on their total income, starting from the assessment year 2021-22. This special provision was introduced to boost economic activity, attract investment, and offer fiscal relief in line with global tax rate reductions.

Key Features of Section 115BAD

1. Eligibility Criteria:
   • The concessional tax rate is available to co-operative societies that are residents of India.
   • To avail of this scheme, the society must exercise the option to opt for this concessional tax regime before the due date for filing the income tax return, as specified under Section 139(1) of the Income Tax Act, for the relevant previous year.
2. Tax Rate and Conditions:
   • Under this provision, the co-operative society can be taxed at the rate of 22% of its total income.
   • The concessional rate is applicable only if the society forgoes certain deductions and exemptions, which are typically available under the regular provisions of the Income Tax Act.
   • A 10% surcharge on the tax is levied, along with a health and education cess of 4% on the total amount of tax and surcharge.
3. Restrictions on Deductions and Exemptions:
   • While opting for taxation under Section 115BAD, the society cannot claim deductions under various sections, including:
     • Section 10AA: Special provisions for newly established units in Special Economic Zones (SEZ).
     • Section 32(1)(iia): Additional depreciation on new machinery or plant.
     • Section 32AD: Investment in new plant or machinery in notified backward areas.
     • Sections 33AB, 33ABA: Provisions for tea, coffee, rubber development, or site restoration funds.
     • Section 35 (1), (2AA), 35AD, 35CCC: Deductions for expenditures on scientific research, capital expenditure on specified businesses, and agricultural extension projects.
     • Sections 80A to 80U: Deductions for various categories under Chapter VI-A, except for Section 80JJAA.
   • Losses or unabsorbed depreciation carried forward from previous years cannot be set off if they pertain to any deductions or incentives mentioned above. These losses are deemed to be fully adjusted and will not be available for deduction in subsequent years.
4. Special Adjustments for Depreciation:
   • If there is unabsorbed depreciation allowance related to additional depreciation that has not been adjusted before the assessment year 2021-22, corresponding adjustments can be made to the written down value (WDV) of the block of assets as of April 1, 2020.
   • Depreciation allowances on certain assets are restricted to a maximum of 40%, specifically for motor buses, motor lorries, and motor taxis used for hire, acquired between August 23, 2019, and March 31, 2020.
5. Conditions for Units in IFSC:
   • If the co-operative society has a unit in the International Financial Services Centre (IFSC), it can still claim deductions under Section 80LA, provided all the conditions in that section are met.

Invalidity of the Option and Withdrawal Conditions

• If a co-operative society fails to meet the specified conditions in any given year, the option to be taxed under Section 115BAD becomes invalid for that assessment year and future years. The regular tax provisions of the Income Tax Act will then apply as if the concessional tax regime had never been exercised.
• Once the option is exercised for a previous year, it cannot be subsequently withdrawn for that or any other previous year.

How to Opt for Section 115BAD?

To avail of the concessional tax rate under Section 115BAD, the co-operative society must:

• Exercise the option by submitting Form No. 10-IF electronically, using a digital signature or electronic verification code (EVC), as prescribed in Rule 21AH.
• The option must be exercised on or before the due date specified for furnishing the return of income under Section 139(1) for the relevant previous year.
• Once the option is exercised, it applies to all subsequent assessment years, and it is irrevocable.

Surcharge and Cess

• Surcharge: A 10% surcharge is applicable on the income tax computed under Section 115BAD.
• Health and Education Cess: An additional cess at the rate of 4% is levied on the total tax and surcharge.

Amendments to Section 115BAD

The Finance Act, 2023, introduced amendments to Section 115BAD, effective from April 1, 2024, updating certain provisions and conditions while retaining the fundamental aspects of the concessional tax regime.

Comparison with Regular Tax Provisions

When compared with the regular tax provisions for co-operative societies, Section 115BAD offers a simplified tax rate of 22% without the availability of various exemptions and deductions. The absence of deductions under specified sections and restrictions on set-off of carried-forward losses are key differentiators that make this scheme suitable for societies looking to benefit from a lower tax rate in exchange for foregoing certain incentives.

Benefits of Opting for Section 115BAD

1. Simplified Tax Calculation:
   • The concessional tax rate of 22% simplifies the computation of total income and reduces the need for complex deductions and exemptions.
2. Lower Tax Rate:
   • For co-operative societies that do not heavily rely on tax incentives, opting for a lower tax rate can result in substantial tax savings.
3. No Minimum Alternate Tax (MAT):
   • Societies taxed under Section 115BAD are not subject to the provisions of Minimum Alternate Tax (MAT) under Section 115JC.
   • Consequently, the provisions related to the carry forward and set-off of MAT credit under Section 115JD are also not applicable.
4. Reduced Compliance Burden:
   • The regime is especially beneficial for societies looking to minimize compliance costs and paperwork by eliminating the need for various deductions and exemptions.

Drawbacks to Consider

1. Irrevocability:
   • Once the option is exercised, it cannot be withdrawn in subsequent years, which means societies must carefully assess the long-term implications before opting for this scheme.
2. Limited Deductions:
   • Societies forfeiting deductions under multiple sections may end up with a higher taxable income, potentially offsetting the benefit of the lower tax rate.

FAQs on Section 115BAD

1. Can a co-operative society revert to the regular tax regime after opting for Section 115BAD?
No, once the option is exercised, it cannot be subsequently withdrawn, making it irrevocable for the opted assessment year and all future years.

2. What happens if the society fails to satisfy the conditions of Section 115BAD?
If the specified conditions are not met in any year, the option becomes invalid, and the co-operative society will be taxed under the regular provisions of the Income Tax Act for that year and all subsequent years.

3. Is the concessional tax rate of 22% applicable to all types of income?
Yes, the concessional tax rate applies to the total income of the co-operative society, computed as per the provisions of Section 115BAD.

4. Are there any special provisions for societies with units in IFSC?
Yes, units in the International Financial Services Centre can claim deductions under Section 80LA, subject to fulfilling the conditions mentioned in Section 80LA.

5. Does Section 115BAD apply to co-operative societies subject to Minimum Alternate Tax (MAT)?
No, societies opting for taxation under Section 115BAD are not subject to MAT provisions.

Conclusion

Section 115BAD provides a beneficial tax regime for resident co-operative societies in India by offering a concessional tax rate of 22% while eliminating the complexities associated with multiple deductions and exemptions. However, societies must carefully evaluate the long-term implications, as the option is irrevocable. By understanding the conditions, benefits, and potential drawbacks, co-operative societies can make informed decisions to optimize their tax planning under this section.

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