115BAB of the Income Tax Act: Guidelines for Implementation

In a bid to make the country a more favourable destination for corporations, the government of India has slashed the corporate tax rate, making it among the lowest in the world. Currently, the corporate tax rate in India starts at 25% and goes all the way to 40%, depending on the residence and turnover of the company.To make the environment more business-friendly, the Indian government introduced two new sections in 2019—Section 115BAA and Section 115BAB—in the Income Tax Act of 1961. Section 115BAA enables domestic companies to pay taxes at a lower rate of 22% compared to the prevailing corporate tax rate in India.Sec. 115BAB of the Income Tax Act, on the other hand, was passed specifically to target manufacturing companies. Continue reading to find out all about this particular section and the various benefits that it has to offer.

Section 115BAB is a special provision inserted into the Income Tax Act of 1961 by the government of India. The section was brought in as part of the Taxation Laws (Amendment) Ordinance, 2019, which was passed on September 20, 2019.Section 115BAB enables new manufacturing entities registered on or after October 1, 2019, to opt for a lower corporate tax rate scheme of 15% (exclusive of surcharge and cess). However, to opt for the scheme, the companies must have begun their manufacturing operations on or before March 31, 2024.

Once a company opts for the concessional corporate tax rate of Section 115BAB, it cannot claim any deduction or exemption under the Income Tax Act, including the provisions pertaining to minimum alternate tax (MAT) .The primary objective of this provision is to encourage new manufacturing entities to set up their operations in India. The introduction of this concessional corporate tax rate provision is expected to boost economic activity, encourage job creation, enhance industrial investments, and support the government’s ‘Make in India’ initiative. Also Read: A Guide to Tax Saving Under Section 10 (10D) of Income Tax

For a company to be eligible for the benefits provided by Section 115BAB of the Income Tax Act, it needs to satisfy the following conditions:

• Chapter VI-A (except Sections 80JJAA, 80M and 10AA)
• Additional depreciation under Section 32
• Investment allowance under Section 32AD
• Sections 33AB and 33ABA
• Sections 35, 35CCD and 35AD

• The company must be incorporated and have its primary place of business in India.
• The company must be in the manufacturing business. It may also choose to distribute the products it manufactures.
• The company must be registered on or after October 1, 2019, and must have begun its manufacturing operations on or before March 31, 2024.
• The company must be a new entity and not the result of a split or reconstruction of an existing business. The only exception to this condition is a company reorganised as per Section 33B of the Income Tax Act, 1961.
• The company must not use any plant, machinery, or equipment previously used in India. However, the company may use imported machinery or equipment that has not been used in India.
• The company must not use any building used as a convention centre or a hotel, as per Section 80-ID of the Income Tax Act of 1961.
• The company’s total income must be calculated without claiming deductions under the following sections of the Income Tax Act:
• The company must not set off any carried-forward loss or unabsorbed depreciation if they pertain to deductions under Chapter VI-A of the Income Tax Act. The only exceptions to this rule are Sections 80JJAA and 10AA.
• The company must file Form 10-1D with the Income Tax Department on or before its due date for filing income tax returns .

The corporate tax rate of 15% specified by Section 115BAB of the Income Tax Act is just the base tax rate. Companies opting for the section would have to pay the base rate along with a surcharge and cess. Here is a table outlining the various additional tax components that a company has to pay along with the base tax rate.

As you can see, a company opting for Sec. 115BAB of the Income Tax Act must pay taxes on their income at a final rate of 17.16% after accounting for surcharge and cess. Also Read: Section 234B & 234C: Understanding Interest and Penalties on Advance Tax and Its Calculation

As you know by now, Section 115BAB of the Income Tax Act can be very advantageous for newly incorporated domestic manufacturing companies since they only have to pay taxes at the rate of 15%, which is far lower than the regular corporate tax rate in India.Some businesses may try to take advantage of this rule by incorporating a new manufacturing entity and transferring the profits or goods made by it to this newly formed company. This way, these businesses can avoid paying tax at the rate of 25% and instead pay at a lower rate.To prevent tax avoidance in such a manner, the Income Tax Department (ITD) has the power to scrutinise related party transactions between companies to ensure that they have been entered as per the arm’s length (fair market) principle. If any transaction is found to have not followed this principle, the excess income derived due to the transaction not being at arm’s length would be automatically subject to tax at 30% (excluding surcharge and cess).Since the consequences are severe, companies must comply with the transfer pricing rules listed under Sections 92BA and 92F of the Income Tax Act of 1961. Also, companies must ensure that all related-party transactions are entered at arm’s length (fair market value) and not at highly favourable conditions.

Section 115BAB and Section 115BAA of the Income Tax Act are both designed to encourage more companies to set up operations in India. Section 115BAB, in particular, aims to attract manufacturing entities by giving them the option to pay taxes at a much lower rate.However, companies that opt for this section would not be able to claim any deduction, exemption, or even the minimum alternate tax (MAT) provisions under the Income Tax Act. Furthermore, to opt for Section 115BAB of the Income Tax Act, companies must file Form 10-1D on or before their due date for filing income tax returns. Also Read: Maximizing Tax Savings: Understanding Sections 80C, 80D, and 80CCD Ready to make the most of your money? Start your tax planning journey now!