Substantially Low Rate of Income Tax for Newly Formed Domestic Companies in Manufacturing Sector – Section 115BAB

1. On fulfilling certain conditions every newly formed domestic company in manufacturing sector can optionally choose to pay income tax @15% on its total income for any previous year relevant to the assessment year beginning on or after 01.04.2020.

  • Surcharge @10% shall be charged irrespective of amount of total income of the domestic company opted to pay tax u/s 115BAB.
  • Health & Education cess @4% shall also be charged.

Therefore, effective tax rate = 15% + (10% of 15%) + (4% of 16.5%) = 17.16%

** 15 + 1.5 = 16.5

Such option has to be exercised by online filing Form 10ID on or before the due date of furnishing the return of income for any previous year relating to the assessment year commencing on or after 01.04.2020 and option once exercised shall apply to subsequent assessment years.

Therefore, the option under section 115BAB can be exercised in any assessment year. But such option once exercised cannot be subsequently withdrawn in future.

Definition of Domestic Company {Section 2(22A)}

“Domestic company” means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income.

*** Indian Partnership firm and LLP cannot be considered as a domestic company.

2. Conditions shall be satisfied for the purpose of section 115BAB

A domestic company has to satisfy following conditions for the purpose of opting to pay tax at the reduced rate u/s 115BAB.

i) The company has been set up and registered on or after 01.10.2019.

ii) The company has to commence manufacturing or production of an article or thing on or before 31.03.2023.

iii) The company is not engaged in any business other than the business of manufacture or production of article or thing and research in relation to or distribution of such article or thing manufactured or produced by it. (See note below)

iv) The business is not formed by splitting up, or the re-construction, of a business already in existence. Provided that this condition shall not apply where the business is re-established revived, re-constructed due to reasons as referred to in and in compliance with section 33B. (See note below)

v) Value of previously used (for any purpose) plant or machinery must not exceed 20% of total value of machinery or plant of the company (see note below).

vi) The company does not use any building previously used as a hotel or convention centre, as the case may be, in respect of which deduction u/s 80ID has been claimed and allowed.

Notes:

Note to Point no. 3

Manufacture or production of article or thing shall not include following business activities:

a) Development of computer software in any form or in any media;

b) Mining;

c) Conversion of marble blocks or similar items into slabs;

d) Bottling of gas into cylinder;

e) Printing of books or production of cinematograph film;

f) Any other business as may be notified by the Central Govt. in this behalf

** Business of production or manufacture of any article or thing shall include the business of generation of electricity.

Note to Point no. 4

Extract of Section 33B

The business was discontinued in any previous year due to natural disaster or riot or civil disturbance, accidental fire or explosion, etc. and such business is re-established, re-constructed or revived by the assessee in compliance with provisions as are specified in the section.

Note to Point no. 5

Machinery or plant shall not be regarded as previously used if following conditions are satisfied:

a) Machinery or plant which was used outside India and such machinery or plant has been imported into from any country outside India.

b) Such machinery or plant was used outside India by any other person

c) Such machinery or plant was not, at any time previous to the date of installation used in India.

d) No deduction on account of depreciation was allowed under the Income Tax Act, 1961 on such machinery or plant in computing the total income of any person for any period prior to the date of installation of the machinery or plant by the assessee.

3. Computation of total income

For the purpose of section 115BAB total income of a domestic company shall be computed in the following manner:

(1) Without claiming any deduction under several sections as mentioned below:

(i) Deduction u/s 10AA: Deduction in respect of newly established units in special economic zones

(ii) Deduction u/s 32(1) (iia): Deduction in respect of additional depreciation

(iii) Deduction u/s 32AD: Deduction on account of setting up of an undertaking and enterprise for manufacture or production of article or thing  and acquire and install new plant or machinery for the said undertaking or enterprise in any notified backward area in the states of Andhra Pradesh, Bihar, Telangana and West Bengal.

(iv) Deduction u/s 33AB: Deduction on account of deposit in Tea, Coffee & Rubber development account.

(v) Deduction u/s 33ABA: Deduction on account of deposit in Site restoration Fund.

(vi) Deduction u/s 35 (2AB), u/s 35 (2AA), u/s 35 (1) (ii), u/s 35 (1) (iia) and u/s 35 (1)(iii): Deduction on account of expenditure on scientific research.

(vii) Deduction u/s 35AD: Deduction in respect of capital expenditure on specified business

(viii) Deduction u/s 35CCC: Deduction in respect of notified agricultural expansion project

(ix) Deduction u/s 35CCD: Deduction in respect of notified skill development project

(x) Deduction under chapter VI-A under the heading “C – Deduction in respect of certain incomes” other than the provisions of section 80JJAA. Sec. 80JJAA: Deduction in respect of employment of new employees. But where a domestic company having a unit in the international financial services centre as referred to in section 80LA (1A) deduction u/s 80LA shall be available to such unit.

(2) Without setting off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions as mentioned in serial no. (i) to (x) above.

(3) Without setting off of any loss or allowance for unabsorbed depreciation deemed so in amalgamation or demerger (i.e. u/s 72A), if such loss or depreciation is attributable to any of the deductions as mentioned in serial no. (i) to (x) above.  In case of amalgamation, the amalgamated company can choose the option to pay tax as per the provisions of section 115BAB provided it has satisfied all the prescribed conditions under the section.

Note: Loss or depreciation as mentioned above in serial number (2) and (3) shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year.

4. Consequence when the option exercised u/s 115BAB become invalid

Where the domestic company fails to satisfy the prescribed conditions as have been described in serial no. 2 or fails to compute of total income in the manner as has been described in serial no. 3 above, in any previous year, the option exercised to pay tax at the reduced rate u/s 115BAB shall become invalid in respect of the assessment year relevant to the previous year and subsequent assessment years. But it will not have any retrospective effect i.e. benefit already availed u/s 115BAB in earlier year/s shall not be withdrawn.

*** Such company may opt to pay income tax @ 25.168% including SC and HEC u/s 115BAA on filing Form 10IC online.

5. MAT is not applicable

The domestic company who has opted to pay tax at the rate as prescribed u/s 115BAB is exempted from provision of MAT.

Further, once option is exercised u/s 115BAB, the tax credit of MAT paid by the domestic company in any earlier year/s shall not be available consequent to exercising of such option.

6. Where income of the assessee includes any income which is neither derived from nor is incidental to manufacturing activity and in respect of which no specific rate has been provided separately, such income shall be taxed @22% and no deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income.

7. 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 and such income shall be taxed @30%.

8. 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 in the hands of the domestic company opted to avail benefit u/s 115BAB.

9. How to file Form 10ID?

Followings are the steps for filing of Form 10ID online onto the portal of www.incometaxindiaefiling.gov.in

1) Logging into company’s PAN A/C through www.incometaxindiaefiling.gov.in

2) Take mouse pointer on e-File tab

3) Click on Income Tax Forms from drop down menu

4) Select form name 10ID then select submission mode

5) Fill up the form

6) Preview & submit

7) Submit under digital signature or EVC

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