With the steepest corporate tax rate cut, India is now at par or even better than other Asians countries & other manufacturing economies of the world.  India’s corporate tax rate for new manufacturing companies would is at 17.16% as against 25.59%, 19%, 25%, 20%, 17% & 24% in USA, UK, China, Vietnam, Singapore & Malaysia, respectively. With the most appealing & highly competitive rate of taxation backed by large population & consumption, India is going to witness the biggest boost to the ‘Make in India’ campaign.

A new section 115BAB is introduced in the Income Tax Act -1961 which provides for concessional rate of taxation @ 17.16% (15% tax rate + 10% surcharge + 4% education cess) for all new domestic companies engaged in manufacturing. Such companies will also not be required to pay Minimum Alternate Tax (MAT) under section 115JB of the Act. Key features of the new taxation provisions are as under:

1. Benefit of concessional rate is available only to the domestic companies which has been registered on or after the 01.10.2019 & has commenced manufacturing on or before the 31.03.2023 (i.e., around 3 ½ years period). Deduction is primarily assessee based and not manufacturing unit based. Benefit is available only if the new company is set up and not if a new unit is set up in an existing company. If existing company intends to avail the benefit of concessional rate, they may set up the new unit under a separate subsidiary company.
2. For availing the benefit of concessional rate, following conditions are applicable:

a] Company should not be have been formed by the splitting up and reconstruction of a business already in existence except in case of a business re-established u/s 33B.

b] Company should not use any plant or machinery previously used for any purpose. However, the company eligible for the benefit if the machinery was used outside India & it is going to be used in India for the first time. Also, the company can use old machinery if its value doesn’t exceed 20% of the total value of the plant and machinery of the company.

c] Company does not use a building previously used as a hotel or a convention centre. ‘Hotel’ means a hotel of 2/3/4 star category as classified by the Central Government. ‘Convention centre’ means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, as may be prescribed.

3. Concessional rate benefit is available only if the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it. Company engaged in service industry or trading business cannot opt for concessional tax regime of 17.16%.

4. Companies opting for concessional rate of taxation will not be eligible for any  exemptions & deduction like exemption u/s 10AA for units in Special Economic Zone, deduction for additional depreciation u/s 32, deduction under Chapter VI-A in respect to certain incomes u/s 80IA, 80IAB, 80IAC, 80IB and so on (except deduction under section 80JJAA), deduction for the capital expenditure incurred by any specified business u/s 35AD, etc.

5. Income Tax authorities are duly empowered to do adjustment to the income if it appears that the amount of profit is inflated by arranging the transactions with other companies to gain the lower tax rate benefit.

6. For availing the concessional rate of taxation, an option has to be exercised by the company on or before the due date of filing return of income. Once the option is exercised, the benefit would continue in subsequent years & cannot be withdrawn subsequently.

However, there are some issues which need clarification by the CBDT. The provisions are very restrictive as concessional rate is applicable if the company is engaged in “manufacturing or production”. If companies either do some trading or render some services in the course of its regular business of manufacturing or production then it may lead to disputes & litigation as to the applicability of concessional rate. Similarly, if company have income in the nature of interest, rental which is taxable as Income from House property or Income from Other source then whether it would also be taxable at the same concessional rate or not could again be a matter of disputes. If company violates any of the conditions mentioned in section 115BAB then there will not be option to the company to opt for the next rate of 22% because of the restrictive clauses in section 115BAA. In such case, the next rate of tax would be 25% or 30%, plus applicable surcharge & education cess. Hopefully, above clarification will reduce the chances of litigation and will boost the new investment in the economy.