Concessional tax regime for resident cooperative societies in India : Clause 203 of the Income Tax Bill, 2025 Vs. Section 115BAD of the Income Tax Act, 1961

Clause 203 Tax on income of certain resident cooperative societies.

Income Tax Bill, 2025

Introduction

Clause 203 of the Income Tax Bill, 2025, introduces a concessional tax regime for resident cooperative societies in India. This provision is situated within the broader context of the Indian government's ongoing efforts to simplify the tax structure and offer competitive tax rates, especially for cooperative entities which play a vital role in the Indian economy. The clause is directly comparable to the existing Section 115BAD of the Income Tax Act, 1961, which was introduced by the Finance Act, 2020, and further operationalized through Rule 21AH of the Income-tax Rules, 1962. This commentary provides a detailed analysis of Clause 203, its objectives, operative provisions, practical implications, and a comparative evaluation with the existing statutory framework.

Objective and Purpose

The legislative intent behind Clause 203 is to provide resident cooperative societies with an alternative, concessional tax regime, subject to specific conditions. The provision is designed to:

• Promote ease of compliance by offering a flat, lower tax rate (22%) as an alternative to the regular, progressive tax rates.
• Encourage cooperative societies to opt for a simplified tax regime by forgoing certain deductions and incentives, thereby reducing administrative complexities and potential disputes.
• Align the tax treatment of cooperative societies with the concessional regimes available to other business entities, such as companies (e.g., Section 115BAA for domestic companies).
• Ensure that the benefit is available only to those societies willing to forgo specified deductions and incentives, thus preventing double benefits or misuse.

Historically, the government has sought to rationalize the tax structure and incentivize voluntary compliance by offering lower tax rates in exchange for foregoing various deductions and exemptions. Clause 203 continues this policy trend, reflecting a move towards broadening the tax base and simplifying compliance.

Detailed Analysis of Clause 203 of the Income Tax Bill, 2025

1. Scope and Applicability

Clause 203 applies to "a person being a co-operative society resident in India." The provision operates "irrespective of anything contained in this Act," but is subject to the provisions of Part A, B, and this Part, except section 204. This non-obstante clause gives Clause 203 overriding effect, subject to specified exclusions. The option to avail the concessional rate is at the discretion of the cooperative society.

2. Concessional Tax Rate and Computation Mechanism

The core of Clause 203 is the concessional tax rate of 22% on the total income of the eligible cooperative society. However, this concessional rate is subject to the following computation mechanism:

• Exclusion of Deductions: The total income must be computed:
  1. Without any deduction under Chapter VIII (other than section 146);
  2. Without deductions u/ss specified in section 205(1)(a) to (g).
• No Set-off of Certain Losses or Depreciation: The total income must be computed without set-off of any loss carried forward or depreciation from any earlier tax year, if such loss or depreciation is attributable to deductions referred to above.

This approach ensures that societies opting for the concessional regime cannot avail themselves of specified deductions or carry forward losses/depreciation related to those deductions, thereby preventing double benefits.

3. Consequences of Non-Compliance

If a society fails to satisfy the requirements of Clause 203(1) in any tax year, the option becomes invalid for that and subsequent years. The regular provisions of the Act then apply as if the concessional option had never been exercised. This is a strict anti-abuse mechanism, ensuring that only compliant societies continue to enjoy the benefit.

4. Deeming Provision for Losses and Depreciation

Clause 203(3) provides that losses and depreciation, which are not allowed to be set off under Clause 203(1)(b), are deemed to have been given full effect to. No further deduction for such loss or depreciation is allowed in any subsequent tax year. This deeming fiction ensures finality and prevents future claims relating to these items.

5. Special Provision for Units in International Financial Services Centre (IFSC)

Clause 203(4) provides a carve-out for societies with a Unit in an IFSC. Such units, if they opt for the concessional regime, are allowed to claim deduction u/s 147 (subject to conditions). This aligns with the policy of providing special incentives for IFSC units, recognizing their strategic importance.

6. Exercise of Option

The concessional regime is not automatic. The option must be exercised in the prescribed manner on or before the due date specified u/s 263(1) for furnishing the return of income. Once exercised, the option applies to subsequent tax years and cannot be withdrawn. This ensures administrative certainty and prevents frequent switching between regimes.

7. Exclusions

Clause 203 expressly does not apply to societies covered under Clause 204, which presumably deals with a different concessional regime (possibly for new manufacturing cooperative societies, akin to Section 115BAE).

Practical Implications

The practical impact of Clause 203 is significant for cooperative societies:

• Tax Planning: Societies must carefully evaluate the trade-off between the concessional rate and the loss of deductions/incentives. For societies with substantial eligible deductions, the regular regime may be preferable.
• Compliance: The requirement to exercise the option in the prescribed manner and within the due date necessitates robust compliance systems and timely decision-making.
• Irrevocability: The inability to withdraw the option once exercised introduces rigidity, requiring societies to undertake a long-term assessment before opting in.
• Impact on Losses and Depreciation: The finality accorded to carried-forward losses and depreciation attributable to disallowed deductions necessitates careful review of past claims before exercising the option.
• IFSC Units: Societies with IFSC units retain the ability to claim specified deductions, preserving their competitiveness.

Comparison with Existing Section and Rules

Comparative Analysis: Clause 203 vs. Section 115BAD

1. Applicability and Structure

Both provisions are optional, apply to resident co-operative societies, and offer a concessional rate of 22%. Both exclude specific categories (Clause 204 under the Bill; Section 115BAE under the Act) from their scope.

2. Computation of Income and Disallowed Deductions

Section 115BAD(2)(i) provides an exhaustive list of deductions not available under the concessional regime, including:

• Section 10AA (SEZ units)
• Section 32(1)(iia) (additional depreciation)
• Section 32AD (investment in new plant in notified backward areas)
• Section 33AB/33ABA (tea/coffee/rubber development and site restoration funds)
• Section 35/35AD/35CCC (scientific research, specified businesses, agricultural extension)
• All Chapter VI-A deductions except Section 80JJAA

Clause 203(1)(a) refers generically to Chapter VIII (presumably corresponding to Chapter VI-A) except Section 146, and to sections specified in Section 205(1)(a)-(g), which likely mirror the list in Section 115BAD. The approach is more cross-referential, suggesting an intent to maintain flexibility in the legislative text.

3. Losses and Depreciation

Both provisions disallow the set-off of carried-forward losses or depreciation attributable to the disallowed deductions. Section 115BAD(2)(ii) and Clause 203(1)(b) are in pari materia.

Section 115BAD(3) contains a specific provision regarding adjustment of written down value (WDV) of assets for depreciation not given full effect prior to April 1, 2021, which is not explicitly found in Clause 203. This omission may reflect the forward-looking nature of the new Bill or a change in the transitional mechanism.

4. IFSC Units

Section 115BAD(4) allows IFSC units to claim deduction u/s 80LA, subject to conditions. Clause 203(4) analogously allows deduction u/s 147 for IFSC units, indicating a renumbering or reorganization of the relevant section in the Bill.

5. Procedure for Exercising the Option

Section 115BAD(5) requires the option to be exercised in the prescribed manner (Rule 21AH) on or before the due date u/s 139(1). Clause 203(5) requires the option to be exercised as prescribed on or before the due date u/s 263(1) (presumably the corresponding section in the Bill). Both make the option irrevocable.

6. Irrevocability and Consequences of Default

Both provisions stipulate that failure to satisfy the conditions results in the option becoming invalid for that and all subsequent years, restoring the taxpayer to the regular regime. The language is functionally identical.

7. Other Observations

Section 115BAD is more detailed in specifying the computation of depreciation and the transitional adjustment for WDV. Clause 203, being part of a new Code, may assume that such details will be provided in subordinate legislation or rules.

Comparative Analysis: Clause 203 vs. Rule 21AH

1. Nature and Purpose

Rule 21AH is a procedural rule that prescribes the form (Form 10-IF) and manner (electronic filing, digital signature/e-verification) for exercising the option u/s 115BAD(5). It also delegates to the Principal Director General of Income-tax (Systems) the responsibility to specify the filing procedure, data standards, and security policies.

Clause 203(5) refers to the option being exercised in the "prescribed manner," indicating that similar procedural rules will be enacted under the new Code. However, Clause 203 itself does not specify the form or electronic process, leaving this to rules yet to be notified.

2. Filing Requirement and Security

Rule 21AH ensures that the exercise of the option is transparent, secure, and verifiable, leveraging digital infrastructure. This is crucial to prevent misuse and ensure that only eligible societies avail of the concessional regime.

Clause 203 is silent on these specifics but, by requiring the option to be exercised in the prescribed manner, implicitly contemplates similar procedural safeguards.

3. Irrevocability and Timing

Rule 21AH reiterates that the option must be exercised on or before the due date for filing the return, matching the substantive provision in Section 115BAD(5) and Clause 203(5).

4. Potential Issues and Ambiguities

Rule 21AH currently refers to Form 10-IF and procedures under the Income-tax Act, 1961. The new Code under Clause 203 will require corresponding forms, procedures, and possibly a new rule analogous to 21AH.

Ambiguities and Potential Issues

• Definition of Disallowed Deductions: Clause 203's reference to "sections specified in section 205(1)(a)-(g)" may create interpretational challenges until section 205 is enacted and clarified. In contrast, Section 115BAD provides an exhaustive list.
• Transition Issues: The transition from Section 115BAD to Clause 203 may raise questions regarding societies already u/s 115BAD. Will a fresh option be required, or will the transition be automatic?
• IFSC Provisions: The change from section 80LA (old regime) to section 147 (new regime) for IFSC units will require stakeholders to understand the new eligibility and compliance requirements.
• Administrative Procedures: The absence of detailed rules for exercising the option under Clause 203 may cause initial uncertainty until the corresponding rules are notified.
• Rigidity of Option: The irrevocability of the option, while administratively convenient, may be harsh in cases of genuine hardship or changed business circumstances.

Practical Implications for Stakeholders

• Cooperative Societies: Must undertake a cost-benefit analysis before opting for the concessional regime, considering the loss of deductions and the finality of the option.
• Tax Professionals: Need to advise clients on the long-term implications, compliance requirements, and transitional issues between the old and new regimes.
• Tax Authorities: Will need to ensure smooth implementation, especially in the first year, with clear guidance on the transition and exercise of the option.
• Policymakers: May need to address ambiguities through clarifications or amendments, especially regarding the scope of disallowed deductions and transition rules.

Comparative Table

Section 115BAD, effective from AY 2021-22, is the current provision offering a similar concessional regime for resident cooperative societies. The comparison is as follows:

Aspect	Clause 203 of the Income Tax Bill, 2025	Section 115BAD of the Income Tax Act, 1961
Applicability	Resident cooperative societies, at their option; not applicable to those under Clause 204	Resident cooperative societies, at their option; not applicable to those u/s 115BAE
Tax Rate	22%	22%
Computation of Income	No deduction under Chapter VIII (except section 146) No deduction u/ss specified in 205(1)(a)-(g) No set-off of loss/depreciation attributable to above deductions	No deduction u/s 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii)-(iii), 35(2AA), 35AD, 35CCC, or under Chapter VI-A (except section 80JJAA) No set-off of loss/depreciation attributable to above deductions Depreciation u/s 32 (other than 32(1)(iia)) allowed as prescribed
Losses and Depreciation	Deemed to have been given full effect; no further deduction allowed for subsequent years	Same; with additional provision for adjustment of WDV for depreciation not given full effect prior to 1 April 2021
IFSC Units	Deduction u/s 147 allowed for IFSC Units (subject to conditions)	Deduction u/s 80LA allowed for IFSC Units (subject to conditions)
Exercise of Option	To be exercised in prescribed manner on or before due date u/s 263(1); once exercised, applies to subsequent years; cannot be withdrawn	To be exercised in prescribed manner on or before due date u/s 139(1); once exercised, applies to subsequent years; cannot be withdrawn
Invalidation of Option	If requirements not satisfied in any year, option becomes invalid for that and subsequent years	Same

Comparative Analysis with Other Jurisdictions

Globally, several jurisdictions offer concessional tax regimes for specific sectors or entities, often in exchange for the forfeiture of certain deductions or incentives. The Indian approach, as reflected in Clause 203 and its predecessors, is broadly consistent with international best practices, emphasizing simplicity, certainty, and broadening the tax base. However, the rigidity of the irrevocability provision is somewhat unique and may warrant reconsideration in light of changing business environments.

Conclusion

Clause 203 of the Income Tax Bill, 2025, represents a continuation and refinement of the policy embodied in Section 115BAD of the Income Tax Act, 1961. It seeks to offer cooperative societies a concessional, simplified tax regime in exchange for foregoing specified deductions and incentives. The provision is well-calibrated to balance the twin objectives of competitiveness and compliance simplification. However, certain ambiguities, especially regarding the scope of disallowed deductions and transition mechanics, require further clarification through subordinate legislation or administrative guidance. As the new regime is implemented, stakeholders will need to navigate the transition carefully, with particular attention to compliance timelines and irrevocability of the option. Future reforms may consider introducing limited flexibility in the option mechanism and further aligning the list of disallowed deductions with policy objectives. 

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Full Text:

Clause 203 Tax on income of certain resident cooperative societies.

 

Dated: 2-5-2025