Section 115BAB

Introduction

The Indian Government, aiming to boost manufacturing activities and promote the “Make in India” initiative, introduced a favorable tax regime for new manufacturing companies. The government inserted Section 115BAB into the Income Tax Act through the Taxation Laws (Amendment) Ordinance, 2019, passed on September 20, 2019, offering a concessional tax rate of 15% to eligible new manufacturing companies.

This section was designed to attract new manufacturing start-ups by providing a low tax rate, encouraging economic activity, and generating employment.

What is Section 115BAB of the Income Tax Act?

The Ministry of Finance (MoF) introduced Section 115BAB to allow domestic manufacturing companies to pay income tax at a concessional rate of 15%. The provision specifically targeted newly established manufacturing entities. However, companies opting for this concessional tax regime would not be eligible for any other government tax breaks or incentives.

The primary goal of Section 115BAB is to boost economic activity, stimulate investment, and increase production. This, in turn, is expected to create job opportunities, enhance liquidity, and improve stakeholders’ profits, which will ultimately drive up demand and consumption.

Key Characteristics of Section 115BAB

Promotion of “Make in India”: Section 115BAB was introduced to support the Government’s “Make in India” initiative by promoting industrial investments in the manufacturing sector.
Eligibility Criteria: Any domestic company incorporated on or after October 1, 2019, and making investments in manufacturing, is eligible to opt for the concessional tax rate of 15% under Section 115BAB.
Commencement of Production: Companies must begin production by March 31, 2023, to qualify for the benefits under this section. They must also refrain from availing of other exemptions or incentives.
Exemption from Alternate Minimum Tax (MAT): Companies opting for Section 115BAB are also exempt from the Alternate Minimum Tax (MAT), further easing their tax burden.
Transfer Pricing Rules: Section 115BAB influences transfer pricing provisions, requiring the assessing officer to evaluate and determine reasonable profits if transactions between associated enterprises result in profits exceeding ordinary levels.

You may also want to know Section 80EE of Income Tax Act

Eligibility for Section 115BAB

Section 115BAB, introduced under the Income Tax Act, of 1961, offers a reduced tax rate to newly established domestic manufacturing companies, encouraging growth in the manufacturing sector. Here’s a breakdown of the eligibility criteria:

1. Newly Incorporated Domestic Manufacturing Companies:

This section applies only to companies incorporated on or after October 1, 2019, that engage in the manufacture or production of any article or thing, or the business of electricity generation.
The company must be domestic, meaning it must be registered in India under the Companies Act, and the provision excludes foreign companies.

2. Commencement of Manufacturing Operations:

The company must begin manufacturing or production operations on or before March 31, 2024, to avail of the benefits under Section 115BAB.
Additionally, the company must not use previously used machinery and must not form by splitting up or reconstructing an existing business.

3. Business Exclusions:

Certain businesses are not eligible for Section 115BAB, including those engaged in activities such as:

Development of computer software.
Mining or exploration of oil and gas.
Bottling of gas, printing of books, production of cinematographic films, and other similar non-manufacturing businesses.

4. No Other Deductions or Exemptions:

Companies opting for Section 115BAB cannot claim any other tax exemptions or deductions, such as those under Sections 10AA, 32AD, 35AD, 80IA, etc., as it is a concessional tax rate scheme. This limitation ensures companies fully comply with the concessional regime and do not benefit from multiple tax reliefs.

You may also want to know Section 80EEB of Income Tax Act

Tax Liability Under Section 115BAB

Companies eligible for Section 115BAB benefit from a significantly reduced tax rate, designed to make manufacturing more competitive in India. Here’s how the tax liability is structured:

1. Tax Rate:

Under Section 115BAB, the tax authorities tax eligible companies at a flat 15% rate on their income, plus the applicable surcharge and cess.

With the standard surcharge rate of 10% and a 4% health and education cess, the effective tax rate comes to 17.16%.

2. MAT (Minimum Alternate Tax) Exemption:

Companies opting for Sections 115BAB are exempt from MAT provisions under Section 115JB. This exemption ensures that eligible companies can benefit from the lower tax rate without facing additional tax burdens.

3. Tax on Short-Term and Capital Gains:

The tax authorities tax any short-term capital gains (STCG) from the sale of assets related to the manufacturing business at the same 15% rate under Section 115BAB.

Additionally, the tax authorities may tax any income earned by these companies from sources other than manufacturing at a standard corporate tax rate, if applicable.

4. No Set-offs or Carry Forward:

Companies under Section 115BAB cannot set off or carry forward any losses or unabsorbed depreciation from previous years if these losses arise from deductions disallowed under Sections 115BAB.

How to Avail Section 115BAB?

Once you opt for sections 115BAB, you need to understand the benefits of it. Companies must follow a formal procedure and maintain compliance with all necessary conditions as follows:

1. Filing Form 10-ID:

Eligible companies must file Form 10-ID with the income tax department to exercise the option of Section 115BAB before filing their income tax return for the relevant assessment year.

The filing of this form is a one-time choice, and once filed, companies cannot withdraw or opt out of Section 115BAB benefits for future years.

2. Compliance with Manufacturing Conditions:

To qualify, companies must ensure that their manufacturing or production activities commence before March 31, 2024, as specified.

Additionally, the company must ensure that it does not use old machinery, or if it does, the old machinery must not exceed 20% of the total machinery used in manufacturing.

3. Maintaining Accurate Books of Accounts:

Since companies under Sections 115BAB are subject to stringent requirements, it’s essential to maintain comprehensive and accurate financial records that demonstrate compliance with Section 115BAB conditions, including manufacturing start date, types of machinery, and sources of income.

4. Adherence to Prohibitions on Deductions and Exemptions:

Companies must refrain from claiming deductions and exemptions such as those under Sections 80-IA, 80-IAB, and others not permissible under Sections 115BAB.

Ensuring full compliance with these restrictions is necessary, as failure to adhere may result in disqualification from the concessional rate benefits.

By following these steps, eligible companies can successfully apply for the reduced tax rate under Section 115BAB and enjoy a competitive tax environment that supports their growth in the manufacturing sector.

Transfer Pricing Provisions

When transactions between the assessee and another person yield profits exceeding ordinary levels due to a close connection, the Assessing Officer (AO) determines reasonable profits. The AO calculates these profits using the transfer pricing rules specified under Section 92F to ensure they align with reasonable standards for the specified domestic transactions.

Conclusion

Section 115BAB of the Income Tax Act is a strategic initiative by the Indian Government to promote manufacturing within the country. By offering a concessional tax rate of 15% and exempting companies from the Alternate Minimum Tax, it aims to create a favorable environment for new manufacturing companies.

This, in turn, supports the “Make in India” initiative, drives economic growth, and generates employment. Companies looking to avail of this section should ensure they meet all eligibility criteria and comply with the necessary provisions to benefit from this advantageous tax regime.

Frequently Asked Questions

What is Section 115BAB?

Section 115BAB of the Income Tax Act offers a concessional tax rate of 15% to new domestic manufacturing companies. It was introduced to promote industrial investment and support the Make in India initiative.

Who is eligible for Section 115BAB?

Companies incorporated on or after October 1, 2019, and commencing production on or before March 31, 2023, are eligible. They must also not claim any other tax exemptions or incentives.

What is the tax rate under Section 115BAB?

The effective tax rate under Section 115BAB is 17.16%, including a 15% basic tax rate, a 10% surcharge, and a 4% CESS.

Can a company opt in and out of Section 115BAB?

No, once a company opts for Section 115BAB, it cannot switch to the standard tax regime in subsequent years.

Are companies under Section 115BAB subject to Alternate Minimum Tax (MAT)?

No, companies opting for Section 115BAB are exempt from the Alternate Minimum Tax (MAT).

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