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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.

  1. Which companies are covered by section 115BAB
  2. How to avail the benefit of a low corporate tax rate
  3. Can a corporate taxpayer opt for section 115BAB
  4. Tax liability under section 115BAB
  5. Applicability of transfer pricing provisions

1. Which companies are covered by section 115BAB

A domestic company satisfying the specified conditions mentioned in (2) below can claim the benefit of section 115BAB. Domestic company includes a company formed and registered in India. The benefit is available from the financial year 2019-20 (AY 2020-21).

2. 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 2023. 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 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 it.

  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

  4. 3. 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 i.e usually 30th September of the assessment year. Once the company opts for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.

    4. Tax liability under section 115BAB

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

    Base tax rate

    Surcharge applicable 

    Cess

    Effective tax rate

    15%

    10%

    4%

    15*1.1*1.04 = 17.16%

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

    5. Applicability of transfer pricing provisions

    a) 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. The Assessing Officer will take only the amount of profits reasonably deemed to be derived from the business.

    b) In a case where the business transaction involves a specified domestic transaction referred to in section 92BA, the profits of the transaction will be determined having regard to the arm’s length price.

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