The Income Tax Amendment Ordinance 2019 had inserted a new section 115BAB in the Income Tax Act 1961 to provide for concessional rate of tax for new manufacturing companies. Subsequently the Income Tax Amendment Act 2019, made few modifications in terms of adding some safeguards to avoid misuse of the section.

ELIGIBILITY

A new domestic company will be eligible to claim a lower tax rate of 15% (Plus Surcharge and Cess, making it an effective tax rate of 17.16%) if an only if all of the following conditions are cumulatively satisfied: –

1. The assessee is a domestic company, this section is not applicable to other entity types.

2. Such company is incorporated on or after 1^st October, 2019.

3. The company has commenced the manufacture or production of an article or thing on or before 31st March, 2023.

4. The business of such company is not formed by splitting up or re-construction of a business already in existence.

5. Such company does not use second-hand machinery (except imported second-hand machinery) whose value is more than 20% of the value of the total Plant & Machinery used by the company.

6. The company does not use any building previously used as a Hotel or Convention Centre and for which a deduction under Section 80ID has been allowed.

7. The company is not engaged in any other business other than: –

• Manufacture of an article or thing.
• Research in relation to such manufacture or production
• Distribution of such article or thing manufactured or produced by it.

8. The company is not engaged in the following businesses: –

• Software Development
• Mining
• Conversion of marble blocks or similar materials into slabs
• Bottling of gas into cylinders
• Printing of books
• Production of cinematograph films
• Any other notified business.

9. The company does not claim any of the deductions/exemptions/benefits mentioned below in          

1.     computing the total income for the purpose of income tax. Therefore, the total income of such company shall be computed without:

1. Claiming any deduction especially available for units established in special economic zones under section 10AA
2. Claiming additional depreciation under section 32(1)(iia) 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
3. Claiming deduction under section 33AB for tea, coffee and rubber manufacturing companies
4. Claiming deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
5. Claiming a deduction for expenditure made for scientific research under section 35
6. Claiming a deduction for the capital expenditure incurred by any specified business under section 35AD
7. Claiming a deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
8. Claiming 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

10.    A new manufacturing company can exercise the option to be taxed under 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.

NOTE

Meaning of Manufacture

the word manufacture has been defined in the Income Tax Act 1961 under section 2(29BA) as follows: –

“manufacture”, with its grammatical variations, means 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;

Tax Rate under sec.115 BAB

The total tax rate applicable to domestic companies who avail the benefits of this section shall be

The provisions of Minimum Alternate Tax (MAT) shall not be applicable to such companies.

Written by Kanuj Gupta