Lowest Income Tax Rate for New Manufacturing companies

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Lowest Income Tax Rate for New Manufacturing companies

With the steepest corporate tax rate cut, India is now at par or even better than other manufacturing economies of the world. Now, corporate tax rate is lower than personal tax rate. It has added new dimension to the old tax planning & optimization approach. Section 115BAB of the Income Tax Act -1961 provides for special & concessional tax rate of 17.16% (15% tax rate + 10% surcharge + 4% education cess). Further, such companies are not liable for Minimum Alternate Tax (MAT) u/s 115JB of the Act.

Key features of the new section 115BAB are as under:

  1. Existing companies will not be able to avail the benefit of section 115BAB. It is available only to new domestic companies (a) registered on or after  01.10.2019 & (b) has commenced manufacturing on or before 31.03.2023 i.e., such option is now available for a period of around 3 years. 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. It 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 the above concessional tax regime.
  2. Option for lower tax rate u/s 115BAB 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 Once the option is exercised, the benefit would continue in subsequent years & cannot be withdrawn subsequently.
  3. Company should not 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.
  4. Company should not use any plant or machinery previously used for any purpose. However, the company is 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 machinery. Further, company should not use a building previously used as a hotel or a convention centre.
  5. Such companies are not eligible for any exemptions & deduction like exemption u/s 10AA for units in SEZ, additional depreciation u/s 32, Chapter VI-A deduction u/s 80IA, 80IAB, 80IAC, 80IB and so on (except deduction under section 80JJAA), capital expenditure for specified business u/s 35AD, etc.
  6. 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.
  7. Meaning of Manufacture & Production: 
  8. i) Section 2(29BA) of the Income Tax Act defines “Manufacture” as a change in a non-living physical object or article or thing,-
    (a) Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

(b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;

  1. ii) The word “Production” is not defined in the Income Tax Act yet but the judiciary have held that it has a wider connotation in comparison to ‘Manufacture’. It includes any activity which brings a commercially new product into existence i.e., any product which is commercially a new product and marketable as such is production.
  1. It has been provided that “Manufacture or Production” shall not include
    (
    idevelopment of computer software in any form or in any media;

(ii) Mining;

(iii) Conversion of marble blocks or similar items into slabs;

(iv)Bottling of gas into cylinder;

(v) Printing of books or production of cinematograph film; or

(vi)  Any other business as may be notified by the Central Government in this behalf; and

  1. Outsourced activity of “Manufacturing or production”:

Every provision needs to be read with the intention of the legislature behind its enactment. Press release issued 20-09-2019 clarifying the intent of section 115BAB reads as under:

In order to attract fresh investment in manufacturing and thereby provide boost to Make In India initiative of the Government, another new provision has been inserted in the Income Tax Act with effect from Financial Year 2019-20 which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to  pay Income tax at the rate of 15%  This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March 2023. The effective tax rate for these companies shall be 17.01% inclusive of surcharge and cess. Also such companies shall not be required to pay minimum Alternate Tax”.

Judiciary in the past in few cases have held that if an outside agency works directly under the supervision and control of the assessee, then it can be reckoned as “manufacturing or production” by the assessee. However, going through the intent for which section 115BAB, in my view, concessional tax rate would be available if the company set up its own manufacturing / production facilities.

  1. Issue which needs urgent clarification:
    Benefit of concessional rate is available only if the company is engaged in “manufacturing or production”.
  2. 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.
  3. 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?

iii.   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.

COMPILATION OF CORPROATE TAX RATE  

  1. All new manufacturing companies engaged in the business of manufacture or production of any aicle or thing and incorporated on or after 01.10.2019 will have effective tax rate of 17.16%. MAT will not be applicable to all such companies.
    2.
          All other existing companies can opt for 22% tax rate (effective tax rate will be 25.16%). Such companies will also get immunity from MAT provisions.
  2. Companies who wish to avail the benefit of MAT credit, exemption, deductions will be normally subject to the effective tax rate of 29.12% or 34.94% depending upon its turnover and profitability. Further, MAT provisions would be applicable to all such companies.

For ease of reference, section 115BAB of the Income Tax Act – 1961 is reproduced hereunder, which reads as under:

Tax on income of new manufacturing domestic companies.

 

115BAB. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAA, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of fifteen per cent, if the conditions contained in sub-section (2) are satisfied:

Provided that where the total income of the person, includes any income, which has neither been derived from nor is incidental to manufacturing or production of an article or thing and in respect of which no specific rate of tax has been provided separately under this Chapter, such income shall be taxed at the rate of twenty-two per cent and no deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income:

Provided further that the income-tax payable in respect of the income of the person deemed so under second proviso to sub-section (6) shall be computed at the rate of thirty per cent:

Provided also that the income-tax payable in respect of income being short term capital gains derived from transfer of a capital asset on which no depreciation is allowable under the Act shall be computed at the rate of twenty-two per cent:

Provided also that where the person fails to satisfy the conditions contained in sub-section (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and subsequent assessment years and other provisions of the Act shall apply to the person as if the option had not been exercised for the assessment year relevant to that previous year and subsequent assessment years.

(2) For the purposes of sub-section (1), the following conditions shall apply, namely:—

(a)  the company has been set-up and registered on or after the 1st day of October, 2019, and has commenced manufacturing or production of an article or thing on or before the 31st day of March, 2023 and,—

  (i)  the business is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of a company, business of which is formed as a result of the re-establishment, reconstruction or revival by the person of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in the said section;

 (ii)  does not use any machinery or plant previously used for any purpose.

Explanation 1.—For the purposes of sub-clause (ii), any machinery or plant which was used outside India by any other person shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:—

(A) such machinery or plant was not, at any time previous to the date of the installation used in India;

(B) such machinery or plant is imported into India from any country outside India; and

(C) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the person.

Explanation 2.—Where in the case of a person, any machinery or plant or any part thereof previously used for any purpose is put to use by the company and the total value of such machinery or plant or part thereof does not exceed twenty per cent of the total value of the machinery or plant used by the company, then, for the purposes of sub-clause (ii) of this clause, the condition specified therein shall be deemed to have been complied with;

(iii)  does not use any building previously used as a hotel or a convention centre, as the case may be, in respect of which deduction under section 80-ID has been claimed and allowed.

Explanation.—For the purposes of this sub-clause, the expressions “hotel” and “convention centre” shall have the meanings respectively assigned to them in clause (a) and clause (b) of sub-section (6) of section 80-ID;

(b) 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.

Explanation.—For the removal of doubts, it is hereby clarified that the business of manufacture or production of any article or thing referred to in clause (b) shall not include business of,—

  (i)  development of computer software in any form or in any media;

  (ii)  mining;

 (iii)  conversion of marble blocks or similar items into slabs;

 (iv)  bottling of gas into cylinder;

  (v)  printing of books or production of cinematograph film; or

 (vi)  any other business as may be notified by the Central Government in this behalf; and

(c)  the total income of the company has been computed,—

 (i)  without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of 79[Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” other than the provisions of section 80JJAA];

 (ii)  without set-off of any loss or allowance for unabsorbed depreciation deemed so under section 72A where such loss or depreciation is attributable to any of the deductions referred to in sub-clause (i).

Explanation.—For the removal of doubts, it is hereby clarified that in case of an amalgamation, the option under sub-section (7) shall remain valid in case of the amalgamated company only and if the conditions contained in sub-section (2) are continued to be satisfied by such company; and

(iii)  by claiming the depreciation under the provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

80[Explanation.—For the purposes of clause (b), the “business of manufacture or production of any article or thing” shall include the business of generation of electricity.]

(3) The loss referred to in sub-clause (ii) of clause (c) of sub-section (2) shall be deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

(4) If any difficulty arises regarding fulfilment of the conditions contained in sub-clause (ii) or sub-clause (iii) of clause (a) of sub-section (2) or clause (b) of said sub-section, as the case may be, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty and to promote manufacturing or production of article or thing using new plant and machinery.

(5) Every guideline issued by the Board under sub-section (4) shall be laid before each House of Parliament, and shall be binding on the person, and the income-tax authorities subordinate to it.

(6) Where it appears to the Assessing Officer that, owing to the close connection between the person to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the person more than the ordinary profits which might be expected to arise in such business, the Assessing Officer shall, in computing the profits and gains of such business for the purposes of this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F:

Provided further that the amount, being profits in excess of the amount of the profits determined by the Assessing Officer, shall be deemed to be the income of the person.

(7) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under sub-section (1) of section 139 for furnishing the first of the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:

Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

Explanation.—For the purposes of section 115BAA and this section, the expression “unabsorbed depreciation” shall have the meaning assigned to it in clause (b) of sub-section (7) of section 72A.]

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