1. Introduction

The Central Government through ‘The Taxation Laws (Amendment) Act, 2019 in September 2019, inserted a new Section 115BAB which gives an option to newly set up manufacturing companies to pay income tax at concessional rate on profits earned by them from business, subject to some prescribed conditions therein (see Para 3).

If a newly setup manufacturing company wants to avail the benefit of this concessional tax rate, it shall exercise this option in the prescribed manner on or before the due date specified u/s 139(1) and before filing income tax return. The option, once exercised, cannot be subsequently withdrawn for that assessment year or successive assessment years till the prescribed conditions are being satisfied.

The Central Government, in its Union Budget for FY 2020- 21 has proposed to extend this option to electricity generating companies also, if such company satisfies those prescribed conditions.

2. Tax Rates for New Manufacturing Companies:

Type of Income Base Tax Rate Surcharge* Health and Education Cess Effective Rate of Tax
Profits from Manufacturing or Production Business 15 % 10 % 4 % 17.16 %
Other Income (No expense shall be allowed for this income) except Special rate incomes.

Short-term capital gain on transfer of capital asset on which depreciation is not allowed.

22 % 10 % 4 % 25.17 %
Income assessed by Assessing Officer under Anti-abusing Provisions of this scheme (See Para 4). 30 % 10 % 4 % 34.32 %

The company shall not be required to pay MAT under Section 115JB of the Income Tax Act.

* Surcharge will be levied irrespective of total income of the company.

Businesswoman and falling tax from stack of books

3. Eligibility Criteria

Sub-section (2) of Section 115BAB puts forth a few conditions to be satisfied by newly setup manufacturing company in order to become eligible for this scheme. Some of the major conditions are as follows:

(a) The company is set up and registered in India on or after the 01st Oct 2019, and commences manufacturing or production including generation of electricity on or before 31st Mar 2023.

(b) The business is not formed by splitting up, or the reconstruction, of a business already in existence.

(c) The company is engaged the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing. However, following business shall not be considered eligible for this purpose,—

(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.

(d) The company does not use plant and machinery that was previously used for any purpose. However, this condition shall not apply:

(i) If such plant and machinery is imported and at any time before the date of its installation, not used in India.

(ii) If total value of such plant and machinery does not exceed 20 % of total value of plant and machinery used by the company.

(e) The company shall not claim deductions in respect of:

(i) Section 10AA (SEZ)

(ii) Additional Depreciation u/s 32(1)(iia)

(iii) Weighted Deductions provided under:

      • Section 32AD (Investment in New Plant and Machinery)
      • Section 33AB (Development Account – Tea / Coffee / Rubber)
      • Section 33ABA (Site Restoration Fund)
      • Section 35 (Expenditure on Scientific Research)
      • Section 35AD (Expenditure on Specified Business)
      • Section 35CCC (Agricultural Extension Project)
      • Section 35CCD (Skill Development Project)

(iv) Deductions under Chapter VI-A other than:

(i) Section 80JJAA (employment of new employees)

(ii) Section 80M (dividend from domestic companies)].

(f) In case of amalgamation, if the amalgamated company wants to avail this option, then the amalgamated company shall not set off or carry forward any loss or unabsorbed depreciation which was related to deductions mentioned in point (e) above.

4. Anti-Abusing Provisions under this scheme

Subsection (6) of Section 115BAB provides that 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 earned and will take only the amount of profits reasonably deemed to be derived from the business.

If a business transaction involves specified domestic transaction as referred to in section 92BA (aggregate value of transactions referred to in exceeds ₹ 20 crores), the profits from that transaction will be determined having regard to the arm’s length price, as defined in Section 92F(ii) .

The excess profits so determined by the Assessing Officer shall be deemed to be income of the company (income assessed under anti-abusing provisions).

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March 2024