Introduction:

The government has implemented a favorable tax framework aimed at supporting newly established manufacturing enterprises. Enacted through the Taxation Laws Ordinance of 2019 on September 20, 2019, Section 115 BAB has been introduced, providing a reduced tax rate of 15% (plus applicable surcharge and cess) for such companies. This initiative is geared towards fostering the growth of nascent manufacturing ventures.

 Section 115 BAB: 

Under Section 115 BAB, certain newly established domestic manufacturing firms have the opportunity to avail themselves of a reduced income tax rate of 15%, inclusive of applicable cess and surcharges, commencing from the fiscal year 2019-2020. However, it’s important to note that once a domestic manufacturing firm opts for this reduced income tax rate, they are obligated to maintain it for the ensuing financial year, as withdrawal of this option is not permissible.

Section 115 BAB of the Income Tax Act, 1961 also states that a flat surcharge of 10% and a cess of 4% will apply to companies opting for this relaxation.

Characteristics of Section 115 BAB:

• Domestic enterprises engaged in manufacturing and incorporated on or before 1 October 2019 are eligible to opt for a 15% reduction in income tax as per section 115 BAB.
• Furthermore, these companies are exempted from the Alternate Minimum Tax (MAT).
• In line with the government’s “Make in India” strategy and to boost industrial investment, the bill introduces a new provision, Section 115 BAB, in the Tax Code, effective from FY 2019–2020
• Domestic enterprises engaged in manufacturing and incorporated on or before 1 October 2019 are entitled to avail the 15% income tax rate under section 115BAB.

Eligibility Criteria:

• Certain manufacturing companies operating in India will qualify for the benefits outlined in Section 115 BAB, subject to meeting the following criteria:
• The company may undertake to manufacture or manufacture goods or products and must carry out research relating to the commercialization of such goods. Furthermore, it can also be involved in the products and services it produces and manufactures.
• A company must be registered or established in India on or after October 1, 2019, and commence manufacturing operations on or before March 31, 2023. Additionally, such companies must also meet the following conditions:
• These companies are prohibited from using used machinery and equipment. But a company is allowed to use machinery and machinery that was previously used abroad, even if it is being used for the first time in India. In addition, a company may use older equipment if its cost is less than 20% of the company’s total plant and machinery costs.
• It should not be established through the splitting up or reconstruction of an existing business, unless it is being re-established under Section 33B.

Tax Rate:

• A domestic company that meets the aforementioned conditions can opt to avail of a tax credit of 15% of its gross income, starting from FY 2019-20 but so this tax rate is subject to specific circumstances, set out below.
• The domestic company must refrain from benefiting from any exemption or incentive provided under other provisions of the Income Tax Act.
• The domestic company must not be involved in any business referred to in section 115 BAB(4).
• The domestic company must abstain from seeking any deduction or allowance under alternative provisions of the Income Tax Act, with the exception of the deduction outlined in section 80JJAA, specifically related to the employment of new staff members.
• A domestic company may not fall under section 115BA, which provides tax relief to companies engaged in specified activities.

Applicability of Section 115 BAB:

• The following bullet points illustrate the impact of section 115 BAB of the Income Tax Act on the transfer pricing provisions.
• Any gains from business transactions classified as “specified domestic transactions” as defined by section 92BA are calculated on the basis of long-arm value.
• where a business surpasses forecasted earnings due to a strong relationship with another corporation or any other factor. In such cases, the assessing officer has the discretion to disregard these additional gains and will only consider the profits that the business should reasonably achieve.

Transfer Pricing  Provisions:

• If a business transaction pertains to a specified domestic transaction as outlined in section 92BA, the profits derived from it will be assessed based on the arms-length price.
• If the company generates above-average profits, through close relationships with third parties or other factors, the auditor has the right to disregard excess earnings rather the manager will consider reasonable profits to be derived solely from business activities.

Conclusion:

Section 115 BAB of the Income Tax Act provides tax breaks for domestic corporations engaged in manufacturing or manufacturing goods. This scheme is aimed at encouraging the establishment of new manufacturing companies in India. However, the criteria for eligibility and the conditions to access this reduced tax rate are rigorous. Therefore, domestic companies should meticulously assess their eligibility before opting for this tax benefit.