Section 115BAA and 115BAB of Income Tax Act: Understanding Tax Benefits for New Manufacturing Companies

The Indian government has introduced various measures to promote investments in the country. One such measure is the introduction of Section 115BAA and Section 115BAB of the Income Tax Act. These sections are designed to incentivize new manufacturing companies to invest in the country. In this blog, we will discuss these sections in detail.

Section 115BAA

Section 115BAA of the Income Tax Act was introduced in the Union Budget of 2019. The section provides a lower tax rate of 22% to new domestic manufacturing companies that are incorporated on or after 1 October 2019. Here are some key features of Section 115BAA:

Eligibility: The section is applicable to domestic companies that are incorporated on or after 1 October 2019 and start manufacturing operations before 31 March 2023.

Tax rate: The tax rate applicable under this section is 22%. However, the company cannot claim any other exemption or deduction.

MAT: Minimum Alternate Tax (MAT) is not applicable to companies that opt for this section.

Carry forward of losses: The company can carry forward and set off its losses against future profits.

Application: The company needs to furnish a declaration in the prescribed form to the income tax department to avail the benefits of this section.

Comparison between Section 115BAA and Section 115BAB

The primary difference between Section 115BAA and Section 115BAB is the tax rate. While Section 115BAA provides a tax rate of 22%, Section 115BAB provides a tax rate of 15%. However, both sections have similar eligibility criteria and other features. Companies need to carefully evaluate the benefits of both sections before making a decision.

Benefits of Section 115BAA and Section 115BAB

The introduction of Section 115BAA and Section 115BAB has several benefits for new manufacturing companies. Some of these benefits are:

1. Lower tax rate: The tax rate for companies that opt for these sections is significantly lower than the normal tax rate. This can help companies save a considerable amount of money and improve their bottom line.
2. Tax holiday: Companies that opt for Section 115BAB can enjoy a tax holiday for the first five years of their operation. This can help companies invest more in their business and expand their operations.
3. No MAT: Minimum Alternate Tax (MAT) is not applicable to companies that opt for these sections. This can help companies save money and improve their cash flow.
4. Carry forward of losses: Companies can carry forward and set off their losses against future profits. This can help companies offset their losses in the initial years and reduce their tax liability in the future.
5. Promotes manufacturing: The introduction of these sections can help promote the manufacturing sector in the country. This can lead to the creation of more jobs and boost economic growth.

Challenges and Criticisms of Section 115BAA and Section 115BAB

While Section 115BAA and Section 115BAB have several benefits for new manufacturing companies, they also face some challenges and criticisms. Some of these are:

1. Limited time period: The benefits of these sections are available only for a limited time period. Companies that are not able to start their operations before 31 March 2023 will not be eligible for the benefits.
2. Restriction on exemptions: Companies that opt for these sections cannot claim any other exemption or deduction. This can be a disadvantage for companies that are eligible for other exemptions or deductions.
3. Limited scope: These sections are applicable only to new manufacturing companies. Existing manufacturing companies are not eligible for the benefits. This can be a disadvantage for companies that have been operating for a long time and are looking for tax incentives to expand their operations.
4. Administration: The implementation of these sections can be challenging for the income tax department. There may be cases where companies falsely claim to be eligible for the benefits, leading to loss of revenue for the government.
5. Uneven distribution of benefits: The benefits of these sections may not be evenly distributed across all regions and sectors. Some regions and sectors may be more attractive for new manufacturing companies than others, leading to an uneven distribution of benefits.

Conclusion

The introduction of Section 115BAA and Section 115BAB of the Income Tax Act is a welcome step towards promoting investments in the manufacturing sector. These sections provide tax incentives to new manufacturing companies and can help boost economic growth in the country. Companies need to evaluate the benefits of these sections and make an informed decision based on their specific requirements.

Read more useful content:

• section 145 of income tax act
• section 10e of income tax act
• section 9 of the income tax act
• section 94b of income tax act
• section 206aa of income tax act

Frequently Asked Questions (FAQs)

1. What is Section 115BAA of the Income Tax Act?

• Section 115BAA provides a lower tax rate of 22% for new domestic manufacturing companies that do not claim any exemptions or deductions.

2. What is Section 115BAB of the Income Tax Act?

• Section 115BAB provides a lower tax rate of 15% for new manufacturing companies that commence production on or before 31 March 2023 and do not claim any exemptions or deductions.

3. Are existing manufacturing companies eligible for the benefits of these sections?

• No, these sections are applicable only to new manufacturing companies.

4. Can companies claim any other exemptions or deductions if they opt for these sections?

• No, companies that opt for these sections cannot claim any other exemptions or deductions.

5. Is Minimum Alternate Tax (MAT) applicable to companies that opt for these sections?

• No, MAT is not applicable to companies that opt for these sections.

6. Is there any time limit for availing the benefits of these sections?

• Yes, the benefits of these sections are available for a limited time period. Companies that do not start their operations before 31 March 2023 will not be eligible for the benefits.

7. Can companies carry forward and set off their losses against future profits if they opt for these sections?

• Yes, companies can carry forward and set off their losses against future profits.

8. Can foreign companies avail of the benefits of these sections?

• No, these sections are applicable only to domestic companies.

9. Will the implementation of these sections lead to loss of revenue for the government?

• There may be cases where companies falsely claim to be eligible for the benefits, leading to loss of revenue for the government. However, the income tax department will take necessary measures to prevent such cases.

10. Will these sections promote investments in the manufacturing sector and boost economic growth in the country?

• Yes, the introduction of these sections is expected to promote investments in the manufacturing sector and boost economic growth in the country by providing tax incentives to new manufacturing companies.