Finance Bill, 2020 has proposed a major concession and in order to bring uniformity between the co-operative societies and corporates, Finance Minister Nirmala Sitharaman proposed reduction of tax on Co-operative societies to 22 per cent plus surcharge and cess with no exemptions / deductions, from 30 per cent at present. Further to enlarge the scope of the section 194A(3)(v) , Finance Bill 2020 proposes co-operative societies are liable to deduct tax.
Author, CA Ashok Mudnur analyses the implications of Section 115BAD and infers that post Budget 2020, if a resident Co-operative bank opts to pay Tax under the new regime, it will save 9.77% on income tax. The Author cautions Co-operative Societies that exemption u/s 80P may be denied to those who have violated provisions of State Co-operative laws, hence it would be wise to choose new tax regime 115BAD. Presently, interest credited or paid by a co-operative society to a member or to any other co-operative society is not liable for tax deduction at source in view of section 194A(3)(v). The Author examines the impact of the proposed amendment in Sec. 194A(3)(v) w.e.f 01.04.2020, and points out that now Big Co-operative societies, having gross receipts exceeds Rs. 50 crore during the last financial year, would be required to deduct tax from interest credited or paid if the amount of interest is more than Rs. 50,000 in case of payee being a senior citizen and Rs. 40,000 in any other case;
A New Tax Regime for Co-operative Societies- Big Thumb-up!
It is no secret that Budget 2020 has garnered mixed feelings from taxpayers. For some it has benefited and among them are the Co-operative Societies engaged in Banking Business. A new optional section 115BAD had been introduced which the Co-operative Societies have to choose.
Section 115BAD: what it states, conditions, and beneficiaries
For the resident co-operative societies, especially those engaged in banking business i.e Urban Co-operativeBanks.
In her Budget announcement, Hon'ble FM Nirmala Sitharaman proposed to introduce a new Section 115BAD in the Income Tax Act. This section is proposed for two reasons:
1. To reduce the income tax rate applicable to resident Co-operative societies in line with the corporate tax rate cut done earlier.
2. To simplify the computation of income tax for resident co-operative societies
Let us now understand how Section 115BAD changes the old tax regime.
Old tax regime for co-operative societies
Before the Budget, a Co-operative society was liable to pay income tax at 30%, together with 12% surcharge and 4% cess. Ultimately, a Co-operative society paid income tax at 34.94% of the total income.
New tax regime for co-operative societies
Post Budget 2020, thanks to Section 115BAD, a resident Co-operative bank can choose to pay income tax at a lower rate of 22% of their total income, surcharge at 10%, and cess at 4% on their tax liability. This sums up to a tax rate of 25.17% on total income, resulting in ~9.77% savings on income tax.
Moreover, the Budget has been reasonable enough to allow Co-operative societies to choose between the new and the old tax regimes. For some Co-operative Societies who have violated provisions under the state Co-operative laws under which they are registered could be hit by Supreme Court Case rendered in the case of The Citizen Co-operative Society Ltd Vs ACIT [TS-5136-SC-2017-O]. For them it would be wise to choose new tax regime 115BAD. In the state laws certain amendments have been brought wherein restriction are placed for associate and nominal member. If these restriction are violated then Co-operative Societies may be denied exemption u/s 80P by the principle laid down in the SC case of Citizen Co-operative Society.
1. Scope of Section 115BAD
Though Section 115BAD would apply to all the resident co-operative societies, it would mainly benefit societies that are hit by Section 80P(4) effective AY 2007-08. It will benefit such societies engaged in banking business i.e Co-operative banks
2. Applicability of Section 115BAD
Section 115BAD would be applicable from the Assessment Year 2021-22. Should a Co-operative society choose to pay income tax as per the new regime, it has to do so on or before the due date of filing returns under Section 139(1), which would be on or before 31st July 2021(Non-audit cases) or 31st October 2021(Audit Cases)
Besides, an assessee should also bear in mind that once they choose to calculate income tax under the new regime, they are required to follow it for all the subsequent years (unless, of course, the government announces any new development). This means that once you compute your income tax as per the new regime, you cannot go back to calculating income tax based on the old regime.
3. How beneficial is Section 115BAD for some Co-operative societies?
Speaking of Co-operative societies other than those who are hit by Section 80(4) (P), they are still entitled to avail the tax exemption u/s 80P depending on the nature of their income. They may continue to pay no or less tax as per the old scheme. Therefore, the new tax regime may or may not be beneficial for them.
Some small societies who are not filing their income tax returns in time have lost exemption u/s 80P because of the substituted section 80AC from AY 2018-19. For these Co-operative Societies the new provision may not be beneficial. For them the old provision may still be beneficial if the return of income is filed within the time prescribed u/s 139(1). For those who have not violated the state Co-operative provisions and for the non banking Co-operative societies the old tax regime would be beneficial subject to they filing return in time.
Another New proposal on TDS when Interest is credited or paid by Big Co-operative Societies to its members.
In the Budget proposal in new Explanation has been added to Sub-Clause V of proviso 3 Section 194A. It is a move to bring more persons into the tax net who have been avoiding the taxman by depositing huge sums with Co-operative societies. It may bring the rich agriculturists who are enjoying huge interest income but not paying any tax. A welcome measure.
The effect of the explanation would bring into its ambit interest credited or paid to members of Co-operative Societies whose total sales, gross receipts or turnover has exceed 50 Crore in the immediate preceding year.
Prior to this interest credited or paid by Co-operative Societies to its members other than Co-operative Banks were not liable to deduct tax because of the exemption given u/s 194A(3)(v).
Now all the Big Co-operative Societies having gross receipts or turnover exceeding 50 Crore have to deduct tax on interest credited or paid to members. In order avoid taxing the small interest payments another explanation (b) has been added whereby senior citizen to whom interest credited or paid is less than Rs 50,000/- and for others RS 40,000/- in par with the provisions applicable to interest payments by Bank and Co-operative Banks. Senior Citizen is one whose age is 60 or more at any time during the relevant previous year. The Big Co-operative Societies would now have to obtain TAN number and will have to comply with TDS norms while paying interest to members.