Introduction
Section 115BAB of the Income Tax Act, 1961 was introduced in the Finance (No. 2) Act 2019 and it provides for a concessional tax rate for domestic companies engaged in the manufacturing or production of goods. This section is applicable from the financial year 2019-20 onwards.
Eligibility Criteria
To avail the benefits under section 115BAB, a domestic company must fulfill the following conditions:
- The company should be incorporated on or after 1st October 2019 and should commence manufacturing or production of goods on or before 31st March 2023.
- The company should not be formed by splitting up or the reconstruction of an existing business.
- The company should not use any machinery or plant previously used for any purpose.
- The company should not have been engaged in any business other than the business of manufacture or production of any article or thing.
- The company should not be engaged in any business referred to in section 115BAB(4).
Tax Rate
A domestic company fulfilling the above-mentioned conditions can opt for a concessional tax rate of 15% on its total income. This tax rate is applicable from the financial year 2019-20 onwards. However, this tax rate is subject to certain conditions, which are as follows:
- The domestic company should not claim any deduction or allowance under any other provisions of the Income Tax Act, except for the deduction provided under section 80JJAA (which relates to employment of new employees).
- The domestic company should not avail of any exemption or incentive under any other provisions of the Income Tax Act.
- The domestic company should not use any brought forward losses or unabsorbed depreciation from any earlier assessment year.
- The domestic company should not be engaged in any business referred to in section 115BAB(4).
- The domestic company should not be a company to which section 115BA applies (which provides for a concessional tax rate to companies engaged in certain specified businesses).
Benefits of Section 115BAB
The concessional tax rate of 15% under section 115BAB is significantly lower than the regular corporate tax rate of 25%. This can lead to substantial tax savings for eligible domestic companies, and can also help them to be more competitive in the market.
The benefits of section 115BAB are not just limited to the lower tax rate. Eligible companies can also benefit from the ease of doing business in India, as the government has taken several steps to streamline and simplify the process of setting up and running a business in India.
Moreover, the government has also introduced various other measures to support the manufacturing sector, such as the Production Linked Incentive (PLI) scheme. Under this scheme, eligible companies can receive incentives for increasing their manufacturing output, and can also benefit from easier access to credit.
Challenges in Implementing Section 115BAB
While section 115BAB offers several benefits to eligible domestic companies, there are also some challenges that need to be addressed in order to make this provision more effective. One of the main challenges is the strict eligibility criteria, which may exclude many companies that could potentially benefit from this provision.
In addition, the requirement that the company should not have been engaged in any business other than the business of manufacture or production of any article or thing, may discourage companies that are engaged in multiple businesses from availing of this tax rate.
Another challenge is the condition that the domestic company should not claim any deduction or allowance under any other provisions of the Income Tax Act, except for the deduction provided under section 80JJAA. This may limit the ability of eligible companies to take advantage of other tax incentives and deductions that could be beneficial for their business.
Impact of Section 115BAB on the Indian Economy
Section 115BAB is a significant step towards making India a more attractive destination for manufacturing companies. By offering a lower tax rate and other incentives, the government is trying to encourage more investment in the sector and create more jobs for the Indian population.
The manufacturing sector has the potential to contribute significantly to the Indian economy, by boosting exports, creating jobs, and promoting innovation and technological development. The introduction of section 115BAB is expected to give a much-needed boost to this sector and attract more domestic and foreign investment in manufacturing.
Moreover, the benefits of section 115BAB are not limited to manufacturing companies alone. The increased investment in the sector can also lead to a spillover effect, as more companies in the supply chain and other related industries benefit from increased demand.
The lower tax rate under section 115BAB can also help to attract more foreign investment to India, as it makes the country more competitive in terms of tax rates. This, in turn, can lead to a more vibrant and dynamic economy, as more companies invest in India and create jobs for the local population.
Conclusion
Section 115BAB of the Income Tax Act, 1961 provides a concessional tax rate to domestic companies engaged in the manufacturing or production of goods. The objective of this provision is to encourage the setting up of new manufacturing businesses in India. The eligibility criteria and conditions to avail of this concessional tax rate are stringent, and a domestic company should carefully evaluate its eligibility before opting for this tax rate.
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Frequently Asked Questions (FAQs)
- What is Section 115BAB of the Income Tax Act 1961?
Section 115BAB is a provision introduced in the Income Tax Act 1961 that allows eligible domestic companies to avail of a concessional tax rate of 15%, provided they meet certain conditions.
2. Which companies are eligible to avail of the benefits under Section 115BAB?
Domestic companies that are engaged in the business of manufacture or production of any article or thing, and have not claimed any deduction or allowance under any other provisions of the Income Tax Act, except for the deduction provided under section 80JJAA, are eligible to avail of the benefits under Section 115BAB.
3. What is the tax rate applicable under Section 115BAB?
The tax rate applicable under Section 115BAB is 15%.
4. What are the conditions that a company needs to fulfill to avail of the benefits under Section 115BAB?
The company should be a domestic company engaged in the business of manufacture or production of any article or thing, and should not have claimed any deduction or allowance under any other provisions of the Income Tax Act, except for the deduction provided under section 80JJAA.
5. Can a company engaged in multiple businesses avail of the benefits under Section 115BAB?
No, a company engaged in any business other than the business of manufacture or production of any article or thing is not eligible to avail of the benefits under Section 115BAB.
6. What is the benefit of availing of the concessional tax rate under Section 115BAB?
The concessional tax rate of 15% under Section 115BAB is significantly lower than the regular corporate tax rate of 25%, and can lead to substantial tax savings for eligible domestic companies.
7. Are there any challenges in implementing Section 115BAB?
Yes, the strict eligibility criteria and the requirement that the company should not have been engaged in any business other than the business of manufacture or production of any article or thing, may exclude many companies that could potentially benefit from this provision.
8. Can foreign companies avail of the benefits under Section 115BAB?
No, Section 115BAB is applicable only to domestic companies.
9. How does Section 115BAB impact the Indian economy?
Section 115BAB is expected to boost manufacturing activity in India, attract more investment in the sector, and create more jobs for the Indian population. The lower tax rate can also help to attract more foreign investment to India.
10. What are some other measures introduced by the government to support the manufacturing sector in India?
The government has introduced several measures to support the manufacturing sector, such as the Production Linked Incentive (PLI) scheme, which offers incentives for increasing manufacturing output, and easier access to credit.
