Tax Benefits Under Section 115BAB for New Manufacturing Companies

Understanding Tax on Income for New Manufacturing Domestic Companies

Section 115BAB(1) stipulates that a domestic company can choose to compute its income tax at "the rate of fifteen percent" for any previous year relevant to the assessment year beginning on or after April 1, 2020, provided the conditions outlined in subsection (2) are met.

Exceptions to Section 115BAB

The following exceptions apply:

Income Not Related to Manufacturing: Any income not derived from or incidental to the manufacturing or production of an article or thing will be taxed at "the rate of twenty-two percent." Additionally, no deductions or allowances for expenditures will be permitted.
Excess Profits: Any amount deemed as income exceeding the profits determined by the Assessing Officer will be taxed at "the rate of thirty percent."
Short-Term Capital Gains: Income from short-term capital gains arising from the transfer of a capital asset, for which no depreciation is applicable under the Act, will be taxed at "the rate of twenty-two percent."
Failure to Meet Conditions: If the conditions in subsection (2) are not satisfied in a given previous year, the option to opt for this taxation shall become invalid for that year and all subsequent assessment years. The individual will be treated as if the option had not been exercised for the relevant assessment years.

Conditions Under Section 115BAB(2)

For subsection (1) to be applicable, the following conditions must be met:

a) The company must be set up and registered on or after October 1, 2019, and must commence manufacturing or production of an article or thing by March 31, 2024.

i) The business should not be formed by splitting or reconstructing an existing business.
ii) No previously used machinery or plant should be utilized (machinery is prohibited if used outside India).

Explanation: If any machinery or plant previously used for any purpose is brought into use, and its total value does not exceed twenty percent of the total machinery's value, this condition is considered satisfied.

iv) The company should not use any building that was previously a hotel or convention center for which a deduction under section 80-ID was claimed and allowed.

b) The company must exclusively engage in manufacturing or production, along with related research and distribution of the manufactured products.

Examples of Activities Not Included in Manufacturing:

Development of computer software in any format
Mining
Conversion of marble blocks into slabs
Bottling gas into cylinders
Printing books or producing cinematographic films
Any other business as notified by the Central Government.

c) The total income must be computed as follows:

i) The entity cannot claim deductions under sections 10AA, 32(1), 32AD, 33AB, 33ABA, partial sections 35, 35AD, 35CCC, and 35CCD (except for 80M & 80JJAA).
ii) There is no set-off of losses or allowances.

Exercising the Option Under Section 115BAB

Once a company opts for this section by the due date specified under subsection (1) of section 139 for filing the first return of income for any relevant previous year, this option will apply for subsequent assessment years. It is important to note that once the option is exercised for any previous year, it cannot be withdrawn for that year or any other.

Can a Company Opt for Section 115BAB After the First Year?

According to Section 115BAB(2)(a), a company established on or after October 1, 2019, can choose this option if it commences manufacturing by March 31, 2024. For instance, a Private Limited Company registered on July 31, 2020, fulfills the first condition.

Continuing with the second condition, if manufacturing commenced in June 2022, the company meets the requirements. Therefore, for the previous year 2022-23 (AY 2023-24), the company can opt for section 115BAB, but not for the previous year 2021-22 (AY 2022-23).

Application Process

To exercise the option under sub-section (7) of section 115BAB of the Income-tax Act, 1961, Form No. 10-ID must be completed, providing:

The registration date of the company
The date of commencement of manufacturing/production.

As per Rule 21AF(1) of the Income Tax Rules, there is no clear stipulation requiring the option to be exercised in the first year of filing returns. This indicates that a Private Limited Company can still opt for section 115BAB beyond the first year.

In conclusion, an eligible company may indeed opt for section 115BAB after the expiration of the first-year return.