Driving India's Manufacturing Growth: Advocating for Section 115BAB Extension

The Government of India introduced the Taxation Laws (Amendment) Ordinance, 2019 outlining key changes to corporate tax rates in the Income-tax Act, 1961. India has been actively fostering the expansion of the manufacturing industry as a crucial catalyst for the economy, positioning it at par with global peers. While the existing domestic companies were offered the option to pay tax at the concessional rate of 22%, for new domestic companies set up on or after 01 October 2019, and commencing manufacturing before 31 March 2023, an even lower concessional tax rate of 15% was made available. However, such companies are required to pay a surcharge of 10%, in addition to a health and education cess of 4%, resulting in an effective tax rate of 17.16%. These reduced tax rates come with a consequential surrender of specified deductions/ exemptions that were previously available. Notably, no minimum alternate tax (MAT) would be applicable to companies opting for either of these options. Companies opting out of the concessional tax rates will continue to enjoy the benefit of such specified deductions/ incentives, and where applicable, be subject to MAT at 15%.

Section 115BAB aims to incentivise domestic production by aligning itself with the 'Make in India' campaign. Even the startups that previously focused solely on the IT/ ITeS are now exploring opportunities in the manufacturing sector. Quoting the Hon'ble Finance Minister Nirmala Sitharaman from the press conference dated 20 September 2019 when the scheme was announced, "In order to attract fresh investment in manufacturing and thereby provide a boost to make in India, another provision has been inserted to the Income-Tax Act with effect from fiscal year 2019-20, which allows any new domestic company incorporated on or after 01.10.2019, making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%." A company that once opts to be governed by this section, cannot opt out later.

Key considerations by taxpayers

While the above measure certainly provides an impetus to the manufacturing sector, it still requires detailed clarity on certain aspects. In this article, we intend to deal with two specific issues:

Extension of the sunset clause for commencing manufacturing business

In the recent interim budget announced in February 2024, in line with the vision of Viksit Bharat, the time period available for startups and investments made by the Sovereign Wealth and Pension Funds, which were set to expire on 31 March 2024, has been extended to 31 March 2025. However, a similar sunset clause exists for section 115BAB, expiring on 31 March 2024, which seems to have been overlooked by the legislature, with no extension provided. This omission appears to be purely unintentional. The competitive tax rate of 15% is among the lowest in the world, even lower than Singapore's 17%. India is quite favourably placed as an alternative manufacturing base to China, and given the geopolitical dynamics, many European/ US companies are looking to shift their production dependencies from China to other countries. When choosing an alternative manufacturing location, one of the most important factors is comparative taxation. Recognising this, the provision was introduced in 2019 by the Hon'ble Finance Minister. It is imperative that this provision continues to support India's ambition to fulfil our vision of becoming a global manufacturing hub.

Business reorganisations or new business by existing entities

Section 115BAB of the Act, titled 'tax on income of new manufacturing companies', includes sub section (2) which stipulates that the business should not have been formed by splitting or reconstructing an existing business. Currently, the concessional rate benefit has not been extended to the existing companies that have been in the manufacturing sector for several decades. The government may consider addressing this in the upcoming budget. The section presently seems to pose a significant hurdle in business expansion. For instance, if an existing company involved in a non-manufacturing business sets up a new subsidiary which will be engaged in the manufacture or production of goods, there is a concern if the newly set up subsidiary will be ineligible from availing the benefit conferred under this section due to "split up of reconstruction". In other words, this company should also be considered as a "new domestic manufacturing company" under 115BAB. The concessional rate should not be denied simply because of common shareholders or members on the board.

Given that section 115BAB of the Act was introduced with an impetus to boost the manufacturing sector, the Government should consider extending the sunset clause for the applicability of this section beyond 31 March 2024 by a few more years.