Introduction:

While conducting market research and business planning is an important step, understanding tax obligations from the outset is equally important. It is particularly important to familiarize yourself with Section 115BA of the Income Tax Act as it sets out the tax structure of businesses like yours.

Section 115BA of the Income Tax Act, introduced in the 2016 Union Budget, aims to provide a standardized tax regime for new manufacturing companies in the country. The segment is designed to promote investment and encourage the growth of India’s manufacturing sector, and presents a range of benefits and incentives. Our blog will examine the complex provisions of section 115BA, making its implications clearer.

 Section 115BA:

Section 115BA of the Income Tax Act pertains to newly incorporated manufacturing companies that have commenced operations between October 1, 2019, and April 1, 2023. These companies have the option to avail themselves of a reduced tax rate of 15% (plus surcharge and cess) on their total income provided they meet specific criteria.

One provision within Section 115BA stipulates that domestic manufacturing companies are not bound by a time constraint when opting for the lower-income tax rate. They retain the flexibility to avail themselves of the benefits outlined in Section 115BAB at any point, following the adjustment of carried forward losses.

Benefits under the Section 115BA:

• A new manufacturing company meeting the aforementioned criteria can choose to pay tax at a reduced rate of 15% (plus surcharge and cess) on its total income. This preferential tax rate applies for the initial 10 years from the year of commencing operations.
• In addition to the reduced tax rate, the new manufacturing company is eligible to claim several other benefits, including:
• While the company is unable to offset or carry forward losses from previous years, it retains the ability to carry forward and utilize the depreciation allowance.
• The Company is not liable for dividend distribution tax (DDT) on cash distributions to shareholders.
• The Company is not eligible to claim any deduction under Chapter VI-A of the Income Tax Act, including deductions for investments, contributions and other expenses
• The concessional tax rate and additional benefits provided by Section 115BA enhance the appeal for foreign investors to allocate funds into new manufacturing ventures in India. This influx of investment can significantly bolster foreign direct investment (FDI) and contribute to the creation of employment opportunities for the local population.
• The eligibility criteria for benefits referred to in section 115BA are clear, facilitating the compliance of other construction companies with the tax law. This streamlined approach saves valuable time and effort, which can then be redirected to nurturing business expansion.
• The reduced tax rate of 15% provided by Section115BA can yield substantial tax savings for new manufacturing companies, particularly in their early operational phases. This financial relief enables them to allocate resources towards expanding and developing their businesses further.

Conditions to Qualify for Section 115BA:

• Below are the conditions to be fulfilled in order to qualify and avail the benefits of section 115BA of the Income Tax Act:
• The company must engage in manufacturing activities focused solely on products or products, including research and subsequent distribution of these products
• In addition, companies are not eligible to claim deductions under Chapter VI-A listed under the heading “C Deductions for Certain Amounts.”
• A company can opt out of benefits under Section115BA only if it chooses to avail benefits under Section115BA.
• As per CBDT regulations, this option will be available in Form 10-IB. Submission of the form online requires either an EVC or a digital signature.
• The company can exercise this option until the due date of filing its Income Tax Return (ITR).
• Ensure that the entity has not already benefited from other deductions under the IT Act, including Section 10AA to Section 80TT which includes Section 32AD, Section 33ABA, Section 35 and so on.
• Both the registration and establishment of the manufacturing company must have occurred on or after March 1, 2016.

Not Qualify for Section 115BA:

Here are some manufacturing businesses that do not fall under the purview of Section 115BA:

• Production of printed books or cinematographic films.
• Transforming marble blocks or similar items into polished slabs.
• Other businesses designated by the Central Government for this purpose.
• Mining

Tax Rates Under Section 115BA:

• The tax rates applicable to Domestic Companies under Section115BA are:
• A surcharge of 7% applies if the income exceeds Rs. 1 crore, and 12% applies if it exceeds Rs. 10 crore.
• A minimum alternate tax of 15% applies.
• A cess of 4% is applicable.
• Certain manufacturing companies will be subject to a 25% tax rate on their income.

Conclusion:

Section 115BA of the Income Tax Act introduces a tax regime for new manufacturing companies, aimed at strengthening India’s manufacturing sector. Its policies offer a range of benefits and incentives to encourage investment and foster growth. However, it is important to examine the eligibility and conditions for these benefits thoroughly before choosing this regime. It is advisable to consult a tax professional to understand the implications of this transaction for the business and tax obligations of the company.