View | How extended timeline for reduced corporate tax rate benefits manufacturing companies

Union Finance Minister Nirmala Sitharaman on February 1, 2022, announced several initiatives in her paperless Budget, which if implemented in the true spirit should help the government accomplish its objective and commitment towards making India a global manufacturing hub as envisioned by the Prime Minister.

The government through the Taxation Law (Amendment) Ordinance, 2019, on December 12, 2019, provided relief by introducing a new section, 115BAB, of the Income Tax Act, 1961 (“Act”), which provided for a tax rate of 15 percent

The purpose of enacting Section 115BAB was to attract investment, create jobs, and stimulate overall economic growth. However, the cumulative impact of the COVID-19 pandemic has resulted in some delays in the formation/registration of new domestic companies, as well as the commencement of manufacturing or production by such companies, if they have been setup and registered.

In order to provide relief to such companies, the Finance Minister through Budget 2022 has proposed to amend section 115BAB so as to provide the benefit by extending the timeline with respect to the commencement of manufacturing or production of an article, from March 31, 2023 to March 31, 2024.

This amendment will take effect from April 1, 2022, and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years. Section 115BAB of the Income-tax Act provides for an option of concessional rate of taxation at the rate of 15 percent for new domestic manufacturing companies provided that they do not avail of any specified incentives or deductions and fulfill certain other conditions as prescribed.

Sub-section (2) of section 115BAB of the Act contains the conditions required to be fulfilled by such companies:

–Clause (a) of said sub-section (2) provides that the new domestic manufacturing company is required to be set up and registered on or after October 1, 2019 and is required to commence manufacturing or production of an article or thing on or before March 31, 2023, which is now amended to March 31, 2024.

–New domestic manufacturing company should not be formed by splitting up or reconstruction of business already in existence.

–Such new domestic manufacturing company should not use any machinery or plant previously used in India for any purpose. Also, the company can use old plants and machinery, the value of which does not exceed 20 percent of the total value of the plant and machinery used by the company.

–New domestic manufacturing company should not use any building previously used as a hotel or convention centre

–New domestic manufacturing company should not be engaged in any business other than manufacturing or production of any article or thing and research in relation to, or distribution of such article or thing manufactured or produced by it.

However, a company willing to opt for beneficial sections would not be entitled to various tax exemption/deduction available under the Act as prescribed under section 115BAB being:

–tax exemption/deduction available under the sections 10AA (tax holiday for SEZ units),

–additional depreciation in terms of section 32(1)(iia),

–additional deduction for investment in machinery under section 32AD,

–deduction for tea/coffee/rubber development account available in terms of section33AB,

–deduction under section 33ABA (site restoration fund),

–weighted deduction for expenditure on scientific research 35(1)(ii) or (iia) or (iii), 35(2AA), 35(2AB)

–capital expenditure for specified business under section 35AD,

–expenditure on agriculture extension projects in terms of section 35CCC or deduction under 35CCD for skill development project or

–any other deduction under Chapter VI-A under the heading “C - deductions in respect of certain incomes” other than section 80JJAA of the Act

Further, the company will not be allowed any set-off of losses carried forward from earlier years if such losses are attributable to any of the deduction/exemption provisions referred in above paragraph and the MAT provisions under section 115JB shall not be applicable to companies opting for sections 115BAB

As the section is newly introduced, its provisions have not been tested judicially so far.

This amendment has brought in the much-anticipated relief for companies that had plans for commencement of production but encountered delays and disruptions as well as for firms that had initiated the process but were unable to make significant progress on account of the pandemic. The amendment further offers additional time for many more taxpayers to jump on board and benefit from this incentive.

Corporate tax rates are critical in attracting inbound investments to any country. Countries across the world have decreased corporation tax rates in recent years in order to encourage investment, consumption, and labour market involvement.

India is competing with countries such as Singapore (17 percent), Ireland (12.5 percent), the United Kingdom (19 percent), the United States (21 percent), Vietnam (20 percent), Thailand (20 percent), Taiwan (20 percent), and others with new corporation tax rate of 15 percent, respectively. The reduction in the business tax rate is in line with worldwide trends and is a well-known strategy for attracting investments.

The manufacturing sector plays a pivotal role in the growth and development of an economy. By incentivising the setting up new domestic manufacturing entities, India is trying to achieve the dual objective, one being promoting domestic players to set up manufacturing facilities thereby accomplishing vision of ‘Atma Nirbhar Bharat’ as well as attracting investments and promoting international players to set up manufacturing facilities in India to accomplish the objective of making India a global manufacturing hub.