Section-115BAB: New Concessional Tax Regime for Manufacturing Companies
Section 115BAB was introduced by the Government through the Taxation Laws (Amendment) Act 2019 to be effective from F.Y. 2019-20 (A.Y. 2020-21) and onwards. By introducing this section, the Indian Government provided a concessional tax regime to domestic companies which are subjected to high income tax rates of 25%-30% plus surcharge & cess. Under section 115BAB of the Income Tax Act, 1961, the new domestic manufacturing companies are subjected to only 15% tax on their total income. The effective tax rate after surcharge and cess will be 17.16% which is very lucrative as compared to present corporate tax rates. However, the companies choosing section 115BAB will have to forego certain deductions available under the Income Tax Act. It should be noted that section 115BAB is not mandatory and a company may or may not opt for section 115BAB at its discretion.
The objective of the Government for introducing section 115BAB is to boost the manufacturing sector thus creating more employment opportunities. Further, lower tax rates will encourage the companies to higher dividend distributions thus bringing more liquidity and demand to the economy. In this article, we will discuss the provisions of section 115BAB in depth to bring the proper understanding of the provisions.
Which company is eligible for claiming lower income tax rates under section 115BAB?
A new domestic company will be eligible to claim a lower income tax rate of 15% plus surcharge and cess. The rate of surcharge is 10% and the cess is 4%. Thus, the effective tax rate will be 17.16%.
The following conditions are to be satisfied for availing benefit u/s 115BAB:
(1) The assessee should be a domestic company. The benefit u/s 115BAB is not available to a foreign company or any other category of assessees.
(2) The company is incorporated on or after 01-04-2019.
(3) The company has commenced the manufacture or production of an article or thing on or before 31st March 2024.
(4) The business of such a company is not formed by splitting up or reconstruction of a business already in existence.
(5) The company shall not employ used or second-hand machinery (except imported second-hand machinery). However, a relaxation of up to 20% of the total value of plant & machinery is given in this condition.
(6)The company does not use any building previously used as a hotel or convention center and for which a deduction u/s 80-ID has been allowed.
(7) The company is not engaged in any business other than the manufacture of an article or thing or research in relation to such manufacture or production or distribution of such article or thing manufactured or produced by it.
(8) The company is not engaged in any of the following businesses:
- Software Development
- Mining
- Conversion of marble blocks or similar material into slabs
- Bottling of gas into cylinders
- Printing of books
- Production of cinematograph films
- Any other notified business
What are the restrictions on a company claiming the benefit of lower tax rate u/s 115BAB?
Section 115BAB provides concessional tax rates subject to the condition that the company shall have to forego various deductions or exemptions under the Income Tax Act. The deductions or exemptions disallowed for the purpose of section 115BAB are mentioned in clause (c) of section 115BAB (2).
Accordingly, the total income of the company shall be computed without considering the following deductions/ benefits:
|
Section |
Deduction or exemption to be foregone if section 115BAA opted |
|
10AA |
Deduction to newly established units in SEZ |
|
32(1)(iia) |
Benefit of additional or accelerated depreciation of 20% or 35% |
|
32AD |
Investment Allowance for investment in plant & machinery in notified backward areas |
|
33AB |
Deduction relating to tea/ coffee/ rubber development account |
|
33ABA |
Deduction relating to the site restoration fund |
|
35(1) |
|
|
35(2AA) |
Deduction relating to any sum paid to a National Laboratory or a University or an IIT or a specified person to be used for scientific research undertaken under an approved program |
|
35(2AB) |
Deduction relating to any expenditure incurred on in-house scientific research and development facility by a company engaged in the business of biotechnology or in any business of manufacture or production of any article or thing other than the article or thing specified in the list of Eleventh Schedule |
|
35AD |
Deduction relating to the deduction on account of capital expenditure on specified business |
|
35CCC |
Deduction relating to the agricultural extension project |
|
35CCD |
Deduction relating to expenditure on the skill development project |
|
Deductions under Chapter VIA |
A domestic company opting for section 115BAB shall not take deductions under Chapter VIA. However, the following deductions are allowed: (a) Section 80JJAA: Deduction in respect of employment of new employees (b) Section 80M: Deduction in respect of inter-corporate dividends Note: Till A.Y. 2020-21, deductions u/s 80G and 80GGB were also available. |
Please note that the company can claim the depreciation while computing its total income but the benefit of additional depreciation is not allowed. Further, there is no restriction on carrying forward or set off of losses or unabsorbed depreciation except the losses or depreciation resulting from the items listed in the above table.
What is the meaning of manufacture or production for section 115BAB?
The words “Manufacture or Production” are not separately defined for the purposes of section 115BAB. Section 2(29BA) of the Income Tax Act defines the term as follows:
“Manufacture”, with its grammatical variations, means a change in a non-living physical object or article, or thing, -
(a) Resulting in the transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character or use; or
(b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;
The word ‘Production’ has not been defined under the Act.
How can a company opt for section 115BAB?
The company intending to avail the benefit of lower tax rates u/s 115BAB is required to intimate the exercising of option to the Income Tax Department by filing Form No. 10-ID on or before the due date of filing ITR u/s 139(1). Such option once exercised shall apply to subsequent assessment years. The option once exercised cannot be withdrawn.
Is Form No. 10-ID to be filed every year?
No, Form No. 10-ID is not required to be filed every year. Once filed in respect of a previous year, the option shall remain valid for that previous year & subsequent previous years.
Anti-Abuse Provisions under section 115BAB
Section 115BAB (6) states that where the assessing officer is satisfied that owing to the close connection between any 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.
It is also provided that if the aforesaid arrangement involves a specified domestic transaction (i.e. falls in the ambit of domestic transfer pricing) u/s 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price.
Is the company opting for section 115BAB liable for MAT?
This is the foremost advantage of section 115BAB that the company opting for section 115BAB is not liable to pay minimum alternate tax (MAT).
Conclusion: Section 115BAB is a welcome step of the Government as it gives a major boost to the manufacturing sector in the form of a very low tax rate. However, a domestic company opting for section 115BAB should clearly go through the conditions & restrictions placed in the section before applying the section.
About Author: The article is contributed by Naveen Goyal who is a qualified Chartered Accountant and is having an experience of over 16 years in the field of direct & indirect taxes.
Disclaimer: The above article is meant for educational purposes only and does no carry any persuasive value. Readers are therefore requested to act diligently and under consultation with any professional before applying the information contained in this article.
