Indian Government has rolled out a separate tax regime under Section 115BAB for setting up of new manufacturing companies in India. This move was brought after the COVID-19 pandemic under the Indian Government strategy to become China + 1.
Section 115BAB provides that if anybody setup a domestic company on or after 01 October 2019 in India and meet the requisite conditions, the company shall be taxable at a lower rate of 15% plus a surcharge of 10% and cess of 4% making the Effective Rate of Tax at 17.16% instead of 25.17% as applicable for other new companies.
The conditions to be eligible for the lower tax rate are as follows:-
1. Setup the company on or after 01 October 2019 and starts the manufacturing by 31st March 2024;
2. Does not use machinery used previously for any purpose;
3. Is not formed by splitting up or reconstruction of business already in existence;
4. Not engaged in any other business than manufacturing; &
5. File the intimation to the government to opt for the lower rate.
Thus, one of the precondition to claim the lower tax rate is to start the manufacturing operations by March 31, 2024 which is fast approaching and thus, the Multinational Companies should explore the possibilities of starting the manufacturing operations atleast before March 2024 in order to avail this benefit.
The term Manufacturing is defined under Section 2(29BA) of the Income tax Act to mean with its grammatical variations a change in a non-living physical object or article or thing-
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.
The definition of Manufacturing was under significant litigations in the past wherein the courts have upheld that even the Test Production can also be considered as manufacturing making business available for the Government benefits.
Thus, it can be concluded that in order to claim the benefit under Section 115BAB of lower tax, the domestic company needs to start atleast a test production by March 31, 2024.
