Section 115BAB (herewith after called “Section”) has been inserted to the Income Tax Act, 1961 (herewith after called “Act”) by the Taxation Laws (Amendment) Act, 2019 which prescribes for 15% tax rate for domestic company that is incorporated after 1st Oct, 2019 & is solely engaged in the manufacturing or production of any article or thing. The surcharge applicable on such tax shall be 10 percent irrespective of the income of the company with health and education cess at the rate of 4 per cent. Thus the effective tax rate will be 17.16 per cent. Also, the Minimum Alternative Tax (MAT) is not applicable to companies opting for this scheme.
However, any prospective company which wishes to avail the benefit of this section shall comply with the certain conditions/restrictions laid down under sub-section (2) of the “Section”, which are read as under:
- 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.
- The business is not formed by splitting up, or the reconstruction, of a business already in existence.
- Does not use any machinery or plant previously used for any purpose.
Where a person, uses machinery or plant previously used and the total value of such does exceeds 20% of the total value of plant or machinery used by the company, the condition specified therein shall be deemed to have been complied with.
Provided a machinery is deemed to be previously not used, if:
- It is previously used outside India, or.,
- Imported from any country outside India, or.,
- No depreciation is claimed on such machinery under IT Act.
- 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.
- 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.
- It has been provided that while computing the total income of such company no deduction on account of SEZ under section 10AA, additional initial depreciation allowable at the rate of 20 per cent under section 32(1)(iia), investment allowance in respect of new plant and machinery under section 32AC, 32AD, Tea Development Benefit under section 33AB, Site Restoration benefit under section 33ABA, Scientific Research benefit under section 35, accelerated capital deduction for specified business under section 35AD, agricultural extension project benefit under section 35CCC, skill development project under section 35CCD and the benefit available under provisions of Chapter VI-A i.e. from section 80C to 80U other than section 80JJAA in respect of employment will not be available and section 80M in respect of inter-corporate dividends (inserted vide Finance Act, 2020).
- The major benefit forgone that is generally available to all assesse companies is related to section 32(1)(iia) that provides for additional initial depreciation @ 20% over & above the normal depreciation allowable under the “Act”.
- Such company shall also not be eligible to set off any loss or allowance for unabsorbed depreciation carried forward from any earlier assessment year if such loss is attributable to any of the above deductions. Accordingly, if there is any carried forward loss or allowance for unabsorbed depreciation the same has to be adjusted by ignoring the deduction if any claimed under any of the above sections referred.
Exercise of option
This “Section” is optional in nature & as per sub-section (7) of the “Section” nothing contained in this section shall apply unless the option is exercised by the person in Form 10D on or before due date furnishing return under section 139(1) of the “Act” and such option once exercised shall apply to subsequent assessment years. Either such company has to exercise the option in the very first year or forgo for all times.
Domestic Company: means a company incorporated in India & include a company which has made arrangement for payment of dividends in India.
Manufacturing: As per Section 2(29BA) of the “Act”, ‘manufacture’ means a change in a non-living physical object/article resulting in transformation into new & distinct object having a different name, character and use.
Production: The term production has not been defined under the “Act”; however, it would be prudent to derive such meaning from the definition of “manufacture”. In the various judgments of the courts it was held that any activity which brings a commercially new product into existence constitute production.
However, certain activities are expressly excluded by the explanation given to sub-section 2(b) of the “Section”:
According to which for the purpose of this “Section” business of manufacture or production of any article does not include business of-
- development of computer software in any form or in any media;
- conversion of marble blocks or similar items into slabs;
- bottling of gas into cylinder;
- printing of books or production of cinematograph film; or
- any other business notified by central government. (not any notified till date)
A new explanation to sub-section (2) of the “Section” has been inserted vide Finance Act, 2020 according to which the “business of manufacture or production of any article or thing” shall include the business of generation of electricity.
Related Party Transactions & Transfer Pricing
According to section 115BAB(6), where the assessing officer is satisfied that owing to the close connection with any person the transactions are so arranged, that they result in the company having greater profits that would otherwise accrue, AO may determine such profits on reasonable means.
In case such transactions are greater than the limit specified for domestic transfer pricing, such profits will be determined having regard to the arm’s length price for such transactions.
Hence transactions between companies claiming lower rate under this section and other group and related parties must be at arm’s length or reasonable basis and not in a manner to evade or reduce tax liability for the group as a whole.
The effective tax rate of 17.16% is quite competitive or even better than the other competing economies of the South East Asia such as China, Thailand, Indonesia, Vietnam, Singapore, Hong Kong etc. There are certain conditions & restrictions to be fulfilled for availing the benefit of reduced rate of Corporate Tax. However, if a business is in a position to satisfy and comply with such conditions and restrictions, it is beneficial for a company to opt for paying tax under the reduced tax regime. In case where heavy capital investment in machinery is required, the investor/company will have to carefully analyze the beneficial tax rate of new provision vis-a-vis the additional depreciation foregone.
“Further, there is an additional deduction under Section 80JJAA of Income Tax Act which is available to Companies (on expenditure incurred on additional employess). It is suggested to read this eligible deduction.”