Analysis of newly inserted Section 115BAB

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The Government, via Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019, has introduced a favorable tax regime for new manufacturing companies.  It has inserted Section 115BAB offering a low tax rate of 15% (plus Surcharge and Health and Education Cess) making an effective rate of 17.16% to new manufacturing companies. 

ELIGIBILITY FOR AVAILING THE LOW CORPORATE TAX BENEFIT UNDER SECTION 115BAB 

The benefit of this section can only be utilized by Domestic companies and no other entity. However, there are some conditions attached which are explained as below: 

  • The domestic company should have been set-up and registered on or after the 1st October, 2019, and has commenced manufacturing or production of an article or thing on or before the 31st March, 2023. 

AnalysisThe government has introduced this section with an intention to favour the economic growth of the country. The Secondary sector growth is vital for boosting the GDP growth and hence it is beneficial for both the economy and  the corporates giving them a much needed incentive to open up units of production and manufacturing. 

  • The business should not be formed by splitting up, or the reconstruction, of a business already in existence (not applicable to a business referred in Sec 33B of I.T Act,1961) 

AnalysisSplitted-up or Reconstructed businesses would not necessarily mean an addition to the existing production value being generated by the Company. A newly set up entity would, on the contrary, mean that there is a supplementary production taking place in the country adding to the GDP growth.

  • The company should not use any machinery or plant previously used for any purpose. However there are few exceptions to this condition which are as follows: 
    • Any Plant or machinery which has been imported to India from anywhere outside the country and the same is not used in India prior to the date on installation. 
    • Plant and machinery or part thereof which has been used before but the value of which, does not exceed 20% of the total value of the machinery or plant used by the company 
    • Deduction should not have been allowed on account of depreciation in respect of the plant or machinery at any previous time before installation  

Analysis: The intension behind attaching this particular condition is that the Government intends and expects companies to invest more and capitalise in form of Plant and Machinery and other fixed assets. 

  • The company cannot 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 of I.T Act,1961 has been claimed and allowed. 

As per the definition in Section 80-ID “hotel” and “convention centre” as been defined respectively: 
“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; 

  • The company should not be engaged in any business other than: 
  • The business of manufacture or production of any article or thing  
  • Research in relation to the manufacturing or production of article or thing 
  • Distribution of such article or thing 

UNDER THIS NEWLY INSERTED SECTION 115BAB BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING DOES NOT INCLUDE THE FOLLOWING BUSINESS: 

  • 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 cylinder; 
  • printing of books or production of cinematograph film; or 
  • any other business as may be notified by the Central Government in this behalf; 

Analysis: By inserting this condition it is clarified that the section is only meant to benefit manufacturing and production industry and activities carried on for facilitating the research and distribution of the same. It has also listed out businesses which may create a confusion regarding their status as to whether they would qualify and be eligible for this section.  

THE INCOME TAX OF THE COMPANY SHOULD BE COMPUTED WITHOUT CLAIMING FOLLOWING TAX EXEMPTIONS AND DEDUCTIONS:

  • Section 10AA: Deduction for units in Special Economic Zone 
  • Section 32: Deduction for additional depreciation under 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 
  • Section 33AB: Deduction for tea, coffee and rubber manufacturing companies 
  • Section 33ABA: Deduction towards deposits made towards site restoration fund by companies engaged in extraction or production of petroleum or natural gas or both in India 
  • Section 35:Deduction for expenditure made for scientific research  
  • Section 35AD: Deduction for the capital expenditure incurred by any specified business  
  • Section 35CCC: Deduction for the expenditure incurred on an agriculture extension project   
  • Section 35CCD: Deduction on skill development project  
  • 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 and 80M (amendment brought in by Finance Bill 2020) 

Analysis: A few deductions and exemptions have been retracted by the government as the company is already benefitting from the concessional tax rate and to avoid double benefits to the company the necessary condition has been inserted .

NOTE-Set-off of loss and Unabsorbed Depreciation cannot be claimed where such loss or depreciation is attributable to the deductions enlisted above while computing Total Income of the company.
NOTE-While computing Total Income of the company, Depreciation under the provision of section 32 can be claimed but Additional Depreciation under clause (iia) of sub-section (1) of the said section cannot be claimed  

WHEN CAN THE COMPANY AVAIL THE BENEFIT OF 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. 

WHAT DOES THE SECTION SAY REGARDING TRANSFER PRICING AND RELATED PARTY TRANSACTIONS? 

If there appears to the Assessing Officer that there is a close connection between the Company and any other person, and the course of business between them is so arranged that the business transacted between them produces to the person more than the ordinary profits which might be expected to arise in such business, the Assessing Officer shall, in computing the profits and gains of such business for the purposes of this section, take the amount of profits as may be reasonably deemed to have been derived therefrom. 

In case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price.  

Conclusion: It’s a great incentive to the new manufacturing companies provided by the government. However, one should make an in-depth study in the light of the deductions and exemptions the company would have to forego in order to avail the benefit of the concessional tax rate. 

Disclaimer: This article doesn’t constitute professional advice. The author does not represent that the said information is correct and complete in all regards. The views contained in this article are personal views of the author and may change depending upon underlying facts and circumstances. Judicial and legal authorities may not subscribe to the views of author and can take different view. Readers of this article are advised to take professional advice before taking any course of action or decision. The author does not assume any responsibility or liability in respect of the information contained in this article or for any decision/ course of action readers may take based on information contained in this article

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