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Section 115BAB of Income Tax Act: Tax Rate for New Manufacturing Companies

Updated: Oct 1

The Ministry of Finance introduced Section 115BAB to allow new domestic manufacturing companies to pay taxes at a concessional rate of 15% (plus surcharge and cess, leading to an effective tax rate of around 17.16%). However, companies opting for this concessional tax rate will not be eligible for certain deductions or incentives under the Income Tax Act, such as deductions under Sections 10AA, 32AD, 33AB, 33ABA, or Chapter VI-A (other than Section 80JJAA). The Ministry allows eligible companies to opt for taxation under Section 115BAB by submitting their choice on or before the due date for filing the income tax return, typically 30th September of the assessment year (unless extended).

Under Section 115BAB of the Income Tax Act, 1961, new domestic manufacturing companies incorporated in India on or after October 1, 2019, and commencing production before March 31, 2024, are eligible for a concessional tax rate of 15% (plus applicable surcharge and cess). This provision was introduced in the Finance Act, 2019, as part of efforts to boost domestic manufacturing and attract new investments into India. The concessional tax rate continues to apply as per the Union Budget 2023 Budget of 2023, provided the company does not avail of any other specified incentives or exemptions. This article will provide a detailed explanation of the eligibility criteria and conditions that companies must meet to benefit from Section 115BAB of the Income Tax Act.

Understanding Section 115BAB of the Income Tax Act

The Ministry of Finance introduced Section 115BAB to allow domestic manufacturing businesses to pay taxes at a 15% rate. Businesses that select concessional tax will no longer be qualified for subsidies or other benefits from the government. The MoF provides companies that meet the requirements for Section 115BAB benefits with the choice of submitting taxes with or without the concessional tax. Section 115BAB's addition will help to increase employment opportunities and economic activity. It will also promote increased production, investment, and liquidity. Stakeholders will benefit from increased profit and disposable income, which will boost demand and consumption. The key characteristics of this section are as follows:

Effective with the 2019–2020 fiscal year, the Ordinance has added a new provision, section 115BAB, to the Income Tax Act in order to promote industrial investment and support the government's "Make in India" agenda.
Businesses that start production before or on March 31, 2023, and do not qualify for any exemptions or incentives, can take advantage of the benefits under Section 115BAB.
Any domestic company that makes a manufacturing investment and is incorporated on or before October 1, 2019, has the option of paying income tax at a rate of 15% under Section 115BAB.
Furthermore, these businesses are not subject to the Alternate Minimum Tax (MAT).

Any Indian business may choose to make a claim under section 115BAB of the Income Tax Act 1961 if it satisfies the requirements outlined under the various sections of the Act. The section has been effective from the assessment year 2020–21.

Benefits of Section 115BAB

Section 115BAB provides a concessional tax rate of 15%, which is substantially less than the standard corporate tax rate of 25%. For qualified domestic businesses, this can result in significant tax savings and improve their competitiveness. The reduced tax rate is not the only advantage of section 115BAB. The government of India has implemented many measures to facilitate the establishment and operation of businesses, so qualifying enterprises can also profit from the ease of doing business in India. In addition, the government has implemented several other initiatives, such as the Production Linked Incentive (PLI) programme, to assist the manufacturing industry. Eligible businesses can benefit from improved finance availability as well as incentives for expanding their manufacturing output under this programme.

Which Companies are Covered under Section 115BAB?

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

How to Avail the Benefit of a Low Corporate Tax Rate? Eligibility Criteria under Section 115BAB

To qualify for the benefits of this section, a business must meet the following requirements:

The business must be established and registered on or after October 1, 2019, and it must start producing goods on or before March 31, 2024. point no. 26 on page 29
A company should not be created by dismantling or rebuilding an already-existing enterprise, unless there is a section 33B business reorganisation.
No building that has ever been used as a hotel or conference centre, as defined by section 80-ID, may be utilised by the company.
Plants and machinery that have been used for any purpose in the past, with the exception of imported plant or machinery that has never been used in India, may not be employed.
The company's entire income should be calculated without deducting any amounts under Chapter VI-A (except from sections 80JJAA and 80M) or section 10AA pertaining to SEZ.
The total income must be calculated without deducting any of the following: additional depreciation under Section 32(1)(iia); investment allowance under Section 32 AD; deduction for Tea Coffee Rubber Development Account under Section 33AB; deduction for Site Restoration Fund under Section 33ABA; deduction for Expenses Expensed for Scientific Research Under Section 35; deduction under Section 35CCD for Agriculture and Skill Development Project; or deduction for Expenses Associated with Specified Business Under Section 35AD Point No. 2 (c)
If a loss is allocated to any deduction under Chapter VI-A (except section 80JJAA) or section 10AA, the company should not claim any set-off of any loss and unabsorbed depreciation carried forward from any prior assessment year.
If the company chooses to use this section, it must submit the income return for the applicable assessment year along with the required form. Such an option cannot be rescinded for later assessment years once it has been utilised.

At the same time, some businesses are not considered to be manufacturing an article. These include mining, bottling of gas into cylinders, conversion of marble blocks or similar items into slabs, development of computer software, and printing of books or cinematograph film production.

Tax Liability under Section 115BAB

For domestic enterprises that benefit from 115BAB, the new effective tax rate is 17.16%. The breakdown of such a tax rate is as follows:

Basic rate= 15%

Surcharge= 10%

Cess= 4%

This tax rate will be in effect starting with the 2019–20 fiscal year. Nevertheless, the following requirements must be met in order for this tax rate to apply:

Except for the deduction allowed under section 80JJAA (which has to do with hiring new staff), the domestic firm is not permitted to claim any deductions or allowances under any other provisions of the Income Tax Act.
No exemption or incentive under any other provisions of the Income Tax Act should be used by the domestic company.
The domestic company shall not be involved in any business described in section 115BAB(4).
Additionally, the domestic firm shall not use any brought forward losses or unabsorbed depreciation from any prior assessment year.
Domestic business should not be covered under section 115BA, which offers firms involved in specific specified businesses a concessional tax rate.

Applicability of Transfer Pricing

If business between the assessee and any other person generates higher profits for the company than ordinary profits, the Assessing Officer (AO) will decide the reasonable earnings and gains from the business. The transfer pricing procedures in Section 92F should be followed to determine the amount of profits for the particular domestic transaction mentioned in Section 92BA. The resulting amendments have been made to the specified domestic transaction as provided in section 92BA.

Conclusion

Domestic businesses that manufacture or produce items are eligible for a concessional tax rate under Section 115BAB of the Income Tax Act of 1961. This clause aims to promote the establishment of new manufacturing companies in India. Before choosing to use this tax rate, a domestic company should carefully consider its eligibility because there are strict requirements and conditions to meet to qualify for this concessional tax rate.

FAQ

Q1. What is Section 115BAB of the Income Tax Act?

A 15% concessional tax rate is available to qualified domestic enterprises under Section 115BAB of the Income Tax Act of 1961, subject to certain requirements.

Q2. Which companies are eligible for the benefits under Section 115BAB?

The benefits under Section 115BAB are available to domestic companies that are in the business of manufacturing or producing any kind of object and have not claimed any deductions or allowances under any other provisions of the Income Tax Act, with the exception of the deduction allowed under section 80JJAA.

Q3. How can a company opt for Section 115BAB?

A newly established manufacturing business may choose to be subject to section 115BAB taxes. Unless otherwise extended, the corporation must take the option before the deadline for submitting income tax returns, which is typically September 30 of the assessment year. The company cannot remove its choice to use this part in later assessment years once it has been made during a financial year.

Q4. Can a company doing multiple businesses get the benefits under Section 115BAB?

No, a corporation that conducts any other type of business than the manufacture or production of goods is not qualified to receive Section 115BAB advantages.

Q5. Can a foreign company get the benefits under Section 115BAB?

No, Section 115BAB applies only to domestic companies.

Q6. Can a company opt out of section 115BAB?

A company cannot opt out of section 115BAB for ensuing assessment years if it chooses to use it during the financial year.

Q7. Which form is to be filed for 115BAB?

If an Indian firm wants to take advantage of section 115BAB and receive a reduced tax rate of 15% (excluding surcharge and cess), they must file Form 10-ID.

Q8. What is the benefit of availing of the tax rate under Section 115BAB?

For qualified domestic enterprises, the 15% concessional tax rate under Section 115BAB can result in significant tax savings above the standard 25% corporation tax rate.

Q9. Are there any challenges in implementing Section 115BAB?

Yes, many businesses that could potentially benefit from this provision may be excluded due to the stringent qualifying requirements and the requirement that the company should not have been engaged in any business other than that of manufacturing or production of any article or thing.

Q10. How does Section 115BAB impact the Indian economy?

It is anticipated that Section 115BAB will increase manufacturing activity in India, draw more capital to the industry, and generate employment opportunities for Indians. An additional benefit of the lower tax rate may be an increase in foreign investment in India.

Q11. Can a Corporate Taxpayer Opt for Section 115BAB

Yes, a corporate taxpayer can opt for Section 115BAB, but it is available only to domestic manufacturing companies. This section offers a reduced corporate tax rate of 15% (plus applicable surcharge and cess) for companies that meet specific conditions, including:

Incorporation Date: The company must be incorporated on or after October 1, 2019.
Commencement of Manufacturing or Production: Manufacturing or production activities must begin on or before March 31, 2024.
Business Restrictions: The company should not be engaged in any businesses other than manufacturing or production. Certain activities like development of software, mining, or running a hotel do not qualify.
Exclusions: The company must not claim any other incentives or deductions, such as those under Section 10AA, additional depreciation under Section 32, or deductions under Chapter VI-A (other than Section 80JJAA).

Corporate taxpayers opting for Section 115BAB will also be exempt from paying Minimum Alternate Tax (MAT). However, once this option is selected, it cannot be withdrawn.