The government has introduced a favourable tax regime for new manufacturing companies. The Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019 has inserted Section 115BAB offering a low tax rate of 15% (plus surcharge and cess) to new manufacturing companies.

The Ordinance comes as a follow up of all the direct tax-related announcements that the Finance Minister has been making over the last few weeks. The biggest change that has been brought about by the Ordinance is the reduction in the corporate tax rate of domestic companies to 22% (15% for new manufacturing companies). The change has been welcomed and is, in fact, the need of the hour since an economic slowdown is currently gripping India1. There is a marked decrease in economic activity and employment resulting in a decrease in consumption, a decrease in investment, liquidity crunch, etc. The reduction in corporate tax rate is likely to result in higher profits being distributed to individual stakeholders thereby increasing their disposable income followed by an increase in demand and consumption. The reduction in the rate should provide an impetus to foreign investors to invest in India.

Companies covered under section 115BAB

A domestic company satisfying the specified conditions mentioned in (2) below can claim the benefit of section 115BAB. The domestic company includes a company formed and registered in India. The benefit is available from the financial year 2019-20 (AY 2020-21).

How to avail the benefit of low Corporate Tax Rate

A domestic company will be entitled to the benefit of low corporate tax rate if it satisfies the following conditions:

  1. The company has been set up and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023. Such a company should:
  2. Not be formed by the splitting up and reconstruction of a business already in existence except in case of a business re-established under section 33B
  3. It does not use any plant or machinery previously used for any purpose. However, the company can use plants and machinery used outside India and used in India for the first time. Also, the company can use old plant and machinery, the value of which does not exceed 20% of the total value of the plant and machinery used by the company.
  4. Does not use a building previously used as a hotel or a convention centre.‘Hotel’ means a hotel of two-star, three-star or four-star category as classified by the Central Government. ‘Convention centre’ means a building of a prescribed area comprising of convention halls to be used to hold conferences and seminars, be of such size and number and having such other facilities and amenities, as may be prescribed.
  5. The company should be engaged in the business of manufacture or production of any article or thing, and research about such article or thing. The company can also be engaged in the distribution of such article or thing manufactured or produced by it.
  6. The total income of the company should be calculated without claiming tax exemptions and incentives:
  7. Deduction under section 10AA for units in Special Economic Zone
  8. Deduction for additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal
  9. Deduction under section 33AB for tea, coffee and rubber manufacturing companies
  10. Deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
  11. Deduction for expenditure made for scientific research under section 35
  12. Deduction for the capital expenditure incurred by any specified business under section 35AD
  13. Deduction for the expenditure incurred on an agriculture extension project under section 35CCC or skill development project under section 35CCD
  14. Deduction under Chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
  15. Set-off of any loss carried forward from earlier years if such losses were incurred in respect of the aforementioned deductions
  16. Deduction for depreciation under section 32, except the additional depreciation as mentioned above

Can a Corporate Taxpayer opt for SEC.115BAB?

A new manufacturing company can exercise the option to be taxed under section 115BAB. The company has to exercise the option on or before the due date of filing income tax returns i.e usually 30th September of the assessment year. Once the company opts for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.

The Concessional tax rate for New Domestic Manufacturing companies under section 115BAB

A domestic manufacturing company can opt for a lower rate of tax of 15 per cents plus surcharge and cess for AY 2020-21 onwards, subject to fulfillment of following conditions:

  • The company should be set-up and registered on or after 1 October, 2019
  • Manufacturing to be commenced on or before 31 March, 2023 and the company is not formed by splitting up or the reconstruction, of a business already in existence.

Applicability of transfer pricing provisions

  1. In a case where due to a close connection between the company and any other person, or for any other reason, the business between them is so arranged such that the company earns more than ordinary profits, the assessing officer may ignore the excess profits. The Assessing Officer will take only the amount of profits reasonably deemed to be derived from the business.
  2. In a case where the business transaction involves a specified domestic transaction referred to in section 92BA, the profits of the transaction will be determined to have regard to the arm’s length price.

Total Tax Liability under sec.115 BAB

The total tax rate applicable to domestic companies who avail the benefits of this section shall be 17.16%(inclusive of Surcharge and Cess). The break up of this tax rate is: 15% (Base Rate)+10% (Surcharge)+4%(Cess).

The provisions of Minimum Alternate Tax (MAT) shall not be applicable to such companies.

Conclusion

This tax cut brings India tax rate closer to the tax rates of all the emerging economies in this part of the world. Added incentives for new manufacturing companies will drive positive vibes across the industry, encourage new investments and create job opportunities and thus help to increase the consumer demand, which is the need of the hour.

We hope that the government can tide through the above pitfalls discussed, and can meet its targeted objective. The government may need to come out with supplementary amendments and clarification to aid its big step forward. The corporate and society at large need to support and help the government in its bid to take the country forward. The reduction in tax rate by such a large margin, is certainly a bold step and would be a big impact on the fiscal deficit for the economy.