Section 115BAB – 15% Tax on newly incorporated manufacturing Companies

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On Friday, 20^th September, 2019 everyone was ready for some announcement regarding discontinuance of GSTR 9 etc from our Finance Minister Nirmala Sitharam. However, to everyone’s surprise the meeting turned out to be an announcement on change in corporate tax rate in India and the headlines were that Corporate Tax rate has been reduced to 15% for manufacturing company and 22% for non-manufacturing company and also many people have addressed this meeting as a mini budget announcement and the changes made in this meeting has been brought into effect by an ordinance, so let’s discuss the newly inserted section 115BAB in brief in this post.

The Bare act language for this section is as follows:

“(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:—

(a) the company has been set-up and registered on or after the 1st day of October, 2019, and has commenced manufacturing on or before the 31st day of March, 2023, and,—

(i) 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 an undertaking 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 by the person, 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.

Explanation. —For the purposes of this sub-clause, the expressions “convention centre” and “hotel” shall have the meanings respectively assigned to them in clause (a) and clause (b) of sub-section (6) of section 80-ID;

(b) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and

(c) the total income of the company has been computed,—

(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” other than the provisions of section 80JJAA ;

(ii) without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i); and

(iii) by claiming the depreciation under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

(3) The loss referred to in sub-clause (ii) of clause (c) of sub-section (2) shall be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

(4) Where it appears to the Assessing Officer that, owing to the close connection between the company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the company more than the ordinary profits which might be expected to arise, the Assessing Officer shall, in computing the profits and gains of such company for the purposes of this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that 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 as defined in clause (ii) of section 92F.

(5) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under sub-section (1) of section 139 for furnishing the first of the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:

Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.”

Some important points from above section:

1. This section is applicable to domestic companies from A.Y. 2020-21, incorporated after 1^st October 2019 and has commenced manufacturing before 31^st March 2023.
2. Such companies should not be formed by reconstruction or splitting up of existing company subject to certain condition.
3. Assessee must not use any machinery which has been previously used in India for any other purpose, however imported machinery will not be included in above exclusion and also if value of such machinery is less than 20% of total machinery then it will be allowed. Assessee also cannot be used any building which was earlier used as Hotel or convention centre.
4. The company formed must only be engaged in business of manufacturing and research of goods which it manufactures.
5. The income of such company must be calculated without claiming any deduction as mentioned in clause (i) above which basically includes deduction of income from SEZ, deduction of investment in machinery by manufacturing unit, deduction for investment in various fund, deduction for expense on research and development, deduction for income from specified business, expenditure on special projects and no deduction of profit from special business covered under section 80IA to 80RRB except 80JJAA.
6. Any set off of earlier business loss due to deduction’s mentioned in point no. 2 won’t be allowed.
7. Additional depreciation cannot be claimed by such company once they choose this section.
8. Once you apply for this section you cannot carry forward any loss referred to in point no. 5 above.
9. To get benefit/ opt for this section in first year you need to file return of income within due date mentioned in section 139(1) of Income Tax Act.

For manufacturing companies these might be looking very attractive but one must compare it with other section in which it can claim deduction i.e. 80IA to 80RRB because once you have opted in this section you can’t take benefit of those sections and also can’t opt out of this section but provision of those section give you deduction of 100% profit for atlease 10 years which is more beneficial and who knows in future you might get better tax rates without such condition so if you are eligible for any such deduction you must not opt in for this section without comparing.

You can read the whole ordinance here: //www.incometaxindia.gov.in/Lists/Latest%20News/Attachments/339/TheTaxation_Laws_Amendment_Ordinance_2019_20_9_19.pdf

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