SECTION 115BAB: TAX ON INCOME OF CERTAIN NEW DOMESTIC 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 introduced  to promote the new manufacturing start-ups.

A domestic company satisfying the specified conditions mentioned in (2) 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).

(1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAA, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of fifteen per cent, if the conditions contained in sub-section (2) are satisfied: (2) For the purposes of sub-section (1), the following conditions shall apply, namely:—

(2) For the purposes of sub-section (1), the following conditions shall apply, namely:—

(a) 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 and,—

(i) the business is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of a company, business of which is formed as a result of the re-establishment, reconstruction or revival by the person of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in the said section

(ii) does not use any machinery or plant previously used for any purpose.

Explanation 1.—For the purposes of sub-clause (ii), any machinery or plant which was used outside India by any other person shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:—

(A) such machinery or plant was not, at any time previous to the date of the installation used in India;

(B) such machinery or plant is imported into India from any country outside India; and

(C) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the person.

Explanation 2.—Where in the case of a person, any machinery or plant or any part thereof previously used for any purpose is put to use by the company and the total value of such machinery or plant or part thereof does not exceed twenty per cent of the total value of the machinery or plant used by the company, then, for the purposes of sub-clause (ii) of this clause, the condition specified therein shall be deemed to have been complied with;

(iii) 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.

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.

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:

1. Base Tax rate: 15%
2. Surcharge applicable: 10%
3. Cess: 4%
4. Effective Tax rate: 15*1.1*1.04=17.16%