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Key Alterations in Tax Audit Report applicable for AY 2020-21: All You Need to Know

Key Alterations - Tax Audit Report - AY 2020-21 - All You Need to Know - taxscan

The income tax law mandates an audit called ‘Tax Audit’. Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity.

As per these provisions, tax audit shall be conducted by a Chartered Accountant who ensures that the taxpayers have maintained proper books of account and complied with the provisions of the Income-tax Act.

Finance Minister Nirmala Sitharaman has made significant cuts to India’s corporate tax rates. In addition, the recent Goods and Services Tax Council meeting introduced a host of measures to boost market sentiment.

The Taxation Laws (Amendment) Act, 2019 inserted two sections to the Income Tax Act namely Section 115BAA and Section 115BAB.

Section 115BAA: Corporate tax rate reduced to 22% for all domestic companies

The amendment has inserted a new Section 115BAA into the Income Tax Act. As of fiscal year 2019-20, all domestic companies can choose to be taxed at the rate of 22% (plus applicable surcharge and cess), provided that they do not avail of specified exemptions or incentives.

A 10% surcharge will be levied. Accordingly, the effective tax rate for companies opting to pay tax under Section 115BAA of the IT Act will be 25.168%.

Domestic companies that avail of this reduced rate will not have to pay minimum alternate tax (MAT) under Section 115JB, currently levied at 18.5% of book profits.

The amendment Act clarifies that companies that do not wish to avail of this concessional rate immediately can opt to do so once applicable exemptions or incentives have expired.

However, once a company opts to be governed by Section 115BAA, it cannot subsequently opt out.

Section 115BAB: Corporate tax rate reduced to 15% for new manufacturing companies

The amendment has inserted a new Section 115BAB into the Income Tax Act, under which a reduced tax rate of 15% plus applicable surcharge and cess will apply to manufacturing companies which:

  • were set up and registered on or after 1 October 2019 and commence manufacturing on or before 31 March 2023;
  • were not formed by splitting up or reconstructing an existing business (a certain level of relaxation applies in this regard);
  • use no machinery or plant previously used for any purpose (a certain level of flexibility applies in this regard);
  • are not engaged in any business other than the manufacture or production of goods or research in relation to, or the distribution of, such goods; and
  • do not avail of specified exemptions or incentives.

Taxpayers have the option of availing of the reduced tax rate. However, once a taxpayer opts to be governed by Section 115BAB of the IT Act, they cannot subsequently opt out.

A 10% surcharge will be levied. Hence, the effective tax rate for companies which opt to pay tax under Section 115BAB of the IT Act will be 17.16%.

Companies which opt for a reduced rate under Section 115BAB of the IT Act will be exempted from MAT.

The Finance Act, 2020, inserted Section 115BAC and Section 115BAD to introduce the concessional tax regimes for Individuals, HUFs and Co-operative society.

Income Tax (22nd Amendment) Rules, 2020

The Central Board of Direct Taxes (CBDT) on October 01, 2020 has issued the Income-tax (22nd Amendment) Rules, 2020 to further amend the Income-tax Rules, 1962.

Rule 5(1), which specifies the depreciation of the block of assets to 40%, has been substituted, namely:

“Provided that the allowance under clause (ii) of sub-section (1) of Section 32 in respect of depreciation of any block of assets entitled to more than forty per cent. shall be restricted to 40%  on the written down value of such block of assets in certain cases.

Firstly, a domestic company which has exercised options under sub-section (4) of Section 115BA, or under sub-section (5) of Section 115BAA, or under sub-section (7) of Section 115BAB.

Secondly, an individual or Hindu undivided family which has exercised option under sub-section (5) of section 115BAC.

Thirdly, a co-operative society resident in India which has exercised option under sub-section (5) of section 115BAD.

A new Rule 21AG, which specifies the exercise of option under sub-section (5) of Section 115BAC, has been inserted, “The option to be exercised in accordance with the provisions of sub-section (5) of Section 115BAC by a person, being an individual or Hindu undivided family, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, shall be in Form No. 10-IE.”

A new Rule 21AH, which specifies the exercise of option under sub-section (5) of Section 115BAD, has been inserted, namely, “The option to be exercised in accordance with the provisions of sub-section (5) of Section 115BAD by a person, being a cooperative society resident in India, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, shall be in Form No. 10-IF.”

Amendments in Form 3CD and Form 3CEB

Form No. 3CD and 3CEB have been modified to accommodate the newly added provisions of 115BA, 115BAA, 115BAB, 115BAC and 115BAD. In form 3CD clauses have been added to provide information regarding the exercising of the option by assessee and provide further adjustments in WDV if the same is exercised and in transfer pricing form new clause have been added to provide for the specified domestic transactions entered into by the assessee with the persons who have availed the option under section 115BAB which has resulted in more than ordinary profits expected to arise in such business.

ITR-6 had been modified to accommodate the new section 115BAA. Following changes have been incorporated

  1. Changes in Schedule-DPM of ITR-6 have been made to incorporate the adjustments of depreciation amount under section 115BAA.
  2.  Changes in Schedule-CFL of ITR-6 have been made to incorporate the adjustments for losses and allowances under section 115BAA.
  3. Changes in Schedule-UD of ITR-6 have been made to incorporate the adjustments for depreciation allowances for opting section 115BAA.

Income Tax (22nd Tax Amendment) Rules, 2020 have provided the required adjustments in the rules and format of Forms, after the introduction of new sections 115BA, 115BAA, 115BAB, 115BAC and 115BAD.

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