Section 115BAB of Income Tax Act: An Overview of Applicability, Benefits, and Impact on Manufacturing Sector

Introduction

Section 115BAB of the Income Tax Act was introduced in the Union Budget of 2019 as a special tax regime for new manufacturing companies. This section provides for a lower corporate tax rate of 15% for domestic companies engaged in manufacturing or production of any article or thing, provided they were incorporated on or after 1st October 2019 and commence manufacturing on or before 31st March 2023. In this blog, we will explore the applicability of Section 115BAB of the Income Tax Act in detail, with proper headings.

1. Eligibility Criteria

To be eligible for the lower tax rate under Section 115BAB, a company must fulfill the following criteria:

• It must be incorporated on or after 1st October 2019.
• It must commence manufacturing or production of any article or thing on or before 31st March 2023.
• It must not be formed by splitting up or reconstruction of an existing business.
• It must not use any plant or machinery previously used for any purpose.
• It must not have claimed certain specified deductions and incentives such as investment allowance, accelerated depreciation, etc.

2. Lower Tax Rate

The lower tax rate under Section 115BAB is 15%, which is significantly lower than the normal corporate tax rate of 25%. However, companies that opt for the lower tax rate will not be able to avail certain specified deductions and incentives such as investment allowance, accelerated depreciation, etc.

3. Exemptions

Companies that opt for the lower tax rate under Section 115BAB will be exempted from paying Minimum Alternate Tax (MAT). Further, they will also be exempted from paying dividend distribution tax (DDT) on the distribution of dividends to shareholders.

4. Tax Treatment on Conversion

If a company that has been granted lower tax rate under Section 115BAB converts itself into any other type of company or fails to fulfill the eligibility criteria, it will be taxed at the normal corporate tax rate of 25% from the year in which it converts or fails to meet the criteria.

6. Benefits

The lower tax rate under Section 115BAB can result in substantial tax savings for new manufacturing companies. This can help companies reinvest the saved funds in business expansion, research and development, or other strategic initiatives. The exemption from MAT and DDT can also reduce the tax burden and improve cash flow for the company.

7. Impact on the Manufacturing Sector

The introduction of Section 115BAB is expected to have a positive impact on the manufacturing sector in India. The lower tax rate can attract foreign investment and encourage new companies to set up manufacturing facilities in the country. This can help create more jobs, increase exports, and boost economic growth.

8. Compliance Requirements

Companies availing the benefits of Section 115BAB must comply with all the regulations and file their tax returns on time. Failure to comply can lead to the loss of tax benefits and additional penalties. Companies must maintain proper records and documents to substantiate their eligibility for the lower tax rate.

5. Conclusion

Section 115BAB of the Income Tax Act provides a lucrative tax regime for new manufacturing companies incorporated on or after 1st October 2019. Companies that fulfill the eligibility criteria can avail a significantly lower tax rate of 15% but will not be able to claim certain specified deductions and incentives. Further, they will be exempted from paying MAT and DDT. However, companies must ensure that they meet the eligibility criteria and comply with all the regulations to avoid losing the tax benefits.

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• 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. Who is eligible for the lower tax rate under Section 115BAB of the Income Tax Act?

• Companies that are incorporated on or after 1st October 2019 and commence manufacturing or production of any article or thing on or before 31st March 2023 are eligible for the lower tax rate.

2. What is the lower tax rate under Section 115BAB?

• The lower tax rate under Section 115BAB is 15%.

3. What are the exemptions under Section 115BAB?

• Companies that opt for the lower tax rate under Section 115BAB will be exempted from paying Minimum Alternate Tax (MAT) and dividend distribution tax (DDT).

4. Can companies claim deductions and incentives if they opt for the lower tax rate under Section 115BAB?

• No, companies that opt for the lower tax rate under Section 115BAB cannot claim certain specified deductions and incentives such as investment allowance, accelerated depreciation, etc.

5. What happens if a company fails to fulfill the eligibility criteria after opting for the lower tax rate under Section 115BAB?

• If a company fails to fulfill the eligibility criteria, it will be taxed at the normal corporate tax rate of 25% from the year in which it fails to meet the criteria.

6. What is the impact of Section 115BAB on the manufacturing sector?

• Section 115BAB is expected to have a positive impact on the manufacturing sector in India. The lower tax rate can attract foreign investment and encourage new companies to set up manufacturing facilities in the country, leading to job creation and economic growth.

7. What are the compliance requirements for companies availing the benefits of Section 115BAB?

• Companies availing the benefits of Section 115BAB must comply with all the regulations and file their tax returns on time. They must also maintain proper records and documents to substantiate their eligibility for the lower tax rate.

8. Can existing companies avail the benefits of Section 115BAB?

• No, only new companies that are incorporated on or after 1st October 2019 and commence manufacturing or production of any article or thing on or before 31st March 2023 are eligible for the lower tax rate under Section 115BAB.

9. How can companies determine their eligibility for the lower tax rate under Section 115BAB?

• Companies can determine their eligibility for the lower tax rate under Section 115BAB by fulfilling the eligibility criteria mentioned in the act.

10. Is the lower tax rate under Section 115BAB a permanent tax regime?

• No, the lower tax rate under Section 115BAB is applicable for a limited period. Companies must commence manufacturing or production of any article or thing on or before 31st March 2023 to avail the benefits of the lower tax rate.