Section 115BAB - Corporate Tax Rate for New Manufacturing Companies

The government has introduced a favourable tax regime for new manufacturing companies. The Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019 has inserted Section 115BAB offering a low tax rate of 15% (plus surcharge and cess) to new manufacturing companies. This is done to promote the new manufacturing start-ups.

Budget 2023 update

The corporate concessional tax rate of 15% is extended for manufacturing companies incorporated on or after the 1st day of October 2019 and that commenced manufacturing on or before 31 March 2024 (earlier it was 31 March 2023).

Which companies are covered under section 115BAB

A domestic company satisfying the specified conditions mentioned below can claim the benefit of section 115BAB. The domestic company includes a company formed and registered in India. The benefit is available from the financial year 2019-20 (AY 2020-21).

How to avail the benefit of a low corporate tax rate

A domestic company will be entitled to the benefit of low corporate tax rate if it satisfies the following conditions:

1. The company has been set up and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2024. Such a company should:
   • Not be formed by the splitting up and reconstruction of a business already in existence except in case of a business re-established under section 33B
   • Does not use any plant or machinery previously used (second hand) for any purpose. However, the company can use plant and machinery used outside India and used in India for the first time. Also, the company can use old plant and machinery, the value of which does not exceed 20% of the total value of the plant and machinery used by the company.
   • Does not use a building previously used as a hotel or a convention centre.‘Hotel’ means a hotel of two-star, three-star or four-star category as classified by the Central Government. ‘Convention centre’ means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, as may be prescribed.
2. The company should be engaged in the business of manufacture or production of any article or thing, and research in relation to such article or thing. The company can also be engaged in the distribution of such article or thing manufactured or produced by them.
3. The total income of the company should be calculated without claiming tax exemptions and incentives:
   • Deduction under section 10AA for units in Special Economic Zone
   • Deduction for additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal
   • Deduction under section 33AB for tea, coffee and rubber manufacturing companies
   • Deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
   • Deduction for expenditure made for scientific research under section 35
   • Deduction for the capital expenditure incurred by any specified business under section 35AD
   • Deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
   • Deduction under Chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
   • Set-off of any loss carried forward from earlier years if such losses were incurred in respect of the aforementioned deductions
   • Deduction for depreciation under section 32, except the additional depreciation as mentioned above

Can a corporate taxpayer opt for section 115BAB

A new manufacturing company can exercise the option to be taxed under section 115BAB. The company has to exercise the option on or before the due date of filing income tax returns which is usually 30th September of the assessment year, unless extended. Once the company opts for this section in a financial year, it cannot be withdrawn in subsequent assessment years.

Tax liability under section 115BAB

The new effective tax rate, which will apply to domestic companies availing the benefit of 115BAB is 17.16% . The break up of such tax rate is as follows:

Such companies will not be required to pay MAT (minimum alternative tax) under section 115JB of the act.

Business not considered as manufacturing of an article or thing

The business of manufacturing an article or thing does not include business of:

• development of computer software in any form or in any media;
• mining;
• conversion of marble blocks or similar items into slabs;
• bottling of gas into the cylinder;
• printing of books or production of cinematograph film

Applicability of transfer pricing provisions

• In a situation where the company earns more than the ordinary profits due to a close connection between the company and any other person, or for any other reason, the assessing officer may ignore the excess profits. The assessing officer will take only the amount of profits reasonably deemed to be derived from the business.
• In case a business transaction involves a specified domestic transaction referred to in section 92BA, the profits of the transaction will be determined having regard to the arms-length price.