Understanding Section 115BA of the Income Tax Act for New Manufacturing Companies
Updated: Oct 1
The Indian government has consistently aimed to boost the nation's manufacturing sector, recognizing it as a crucial pillar for economic growth and job creation. In line with this vision, the Union Budget of 2016 introduced Section 115BA of the Income Tax Act, offering a concessional tax regime for newly established domestic manufacturing companies. This provision is a game-changer for businesses looking to invest in India's manufacturing landscape, providing attractive tax incentives to fuel expansion and competitiveness. In this article, we will break down the key elements of Section 115BA, its eligibility criteria, and how companies can leverage these benefits to drive growth.
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Section 115BA of the Income Tax Act
The IT Act's Section 115BA addresses the applicable tax rates for Indian manufacturing enterprises under specific circumstances. The tax rate is 25% for manufacturing companies that comply with all of Chapter XII's requirements (with the exception of Sections 115BAAA & 115 BAB). There is no deadline for domestic manufacturing enterprises to select lower-income tax, according to one of Section 115BA's subsections. Once they have adjusted the brought forward losses, they are free to utilise the benefits of Section 115 BAB at any time. For newly formed manufacturing businesses that are incorporated after October 1, 2019, and start operations before April 1, 2023, Section 115BA of the Income Tax Act is applicable. If certain requirements are met, these businesses have the option to pay tax at a reduced rate of 15% (plus surcharge and cess) on their entire income.
Eligibility Criteria for Section 115BA: Conditions to be Fulfilled
The following requirements must be met for you to be eligible for and make use of Section 115BA of the Income Tax Act's benefits:
The manufacturing company's formation and registration must have been finished by March 1, 2016, at the latest.
The organisation may only have ties to manufacturing companies that create goods or publications. Research on those pieces and how they were distributed must also be included.
Verify that the business hasn't previously claimed the advantages of any other IT Act deductions. This covers every section between Section 10AA to Section 80TT (including Sections 32AD, 33ABA, 35, and so on).
In addition, the companies are not permitted to deduct under Chapter VI-A's rules, which fall under the category of "C.—Deductions in respect of certain incomes."
The business has until the ITR filing deadline to utilise this option.
A corporation may only choose to forego benefits under Section 115BA if it also wishes to opt for benefits under Section 115BAA. In compliance with CBDT regulations, this option will be available on Form 10-IB. The form must be submitted online with a digital signature or under EVC.
Exceptions include manufacturing businesses engaged in mining, bottling gas into cylinders, book printing or cinematograph film production, conversion of marble blocks or similar items into polished slabs, and other businesses that the Central Government notifies on this behalf.
List of Deductions not Allowed under Section 115BA
Deductions for the following sections are not allowed while calculating the income tax under section 115BA:
Deductions from Special Economic Zones (SEZ) units (Section 10AA)
Expenditure allocated on machinery and new plants manufactured in backward areas in Andhra Pradesh, Bihar, Telangana and West Bengal (Section 32AD)
Deduction on rubber manufacturing, coffee, and tea (Section 33AB)
Deposits to the site restoration fund by the companies producing or extracting natural gas and petroleum in India (Section 33ABA)
Deduction under section 32AC, 35(1)(ii)/(iia)/ (iii)/ 35(2AA)/(2AB), 35AC of the Income Tax Act
Capital spent by any particular business (Section 35AD)
Investment in agriculture extension projects (Section 35CCC)
Investment in skill development projects (Section 35CCD)
Additional deduction given under section 32
Deduction under sections 80H to 80TT except for 80JJAA
No set-off or carried forward losses accredited to the aforementioned deductions from previous years
Tax Rates under Section 115BA
Domestic businesses that were founded on or after March 1, 2016, and that manufacture or produce any kind of item are governed by the rules outlined in Income Tax Act Section 115BA. Domestic manufacturing or production enterprises are eligible for a special 22% tax rate, provided they meet the requirements outlined in the Income Tax Act. Additionally, a 7% surcharge applies if income exceeds Rs. 1 crore. The surcharge is 12% if it exceeds Rs. 10 crore. A 4% cess and 15% minimum alternate tax are also applicable.
How Do New Manufacturing Companies Benefit from Section 115BA?
If a newly established manufacturing business meets the aforementioned requirements, it may choose to pay taxes at a reduced rate of 15% (plus surcharge and cess) on its total revenue. The first ten years following the year that activities begin are covered by this special tax rate. The new manufacturing firm is eligible for additional benefits in addition to the reduced tax rate. These incentives include the following:
Section 115BA offers support for newly established manufacturing businesses, particularly those that incorporate after October 1, 2019. This part promotes new enterprises to establish manufacturing units and contribute to the growth of the Indian economy by granting a lower tax rate of 15%.
Section 115BA's concessional tax rate and other perks entice foreign investors to invest in India's emerging manufacturing sector. Increased foreign direct investment (FDI) and job possibilities for the local populace may result from this.
New manufacturing enterprises can save a lot of money on taxes, especially in the early years of their operations, thanks to Section 115BA's reduced tax rate of 15%. This might assist them in allocating their resources to the growth and development of their company.
New manufacturing businesses find it simpler to deal with tax regulations because the requirements for obtaining the benefits under Section 115BA are uncomplicated. They can save time and effort by doing this, which they may use to expand their firm.
For new manufacturing businesses, the Section 115BA exemption is a big benefit. They will be able to preserve cash flow and reinvest in their companies as a result.
Advantages of Section 115BA
A newly established manufacturing company that meets the specified criteria can choose to pay a reduced tax rate of 15% (plus applicable surcharge and cess) on its total income. This preferential tax rate is available for the first 10 years starting from the year it begins operations.
In addition to the reduced tax rate, the new manufacturing company can also avail itself of certain other benefits, including:
No Deductions Under Chapter VI-A: The company is ineligible to claim any deductions under Chapter VI-A of the Income Tax Act, which encompasses deductions for investments, charitable donations, and various other expenses.
No Set-Off or Carry Forward of Losses: The company cannot offset or carry forward losses from previous years. However, it is permitted to carry forward and set off its depreciation allowance.
Exemption from MAT: The company is not obligated to pay Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act.
Exemption from DDT: The company is not required to pay Dividend Distribution Tax (DDT) on dividends distributed to its shareholders.
Benefits of Section 115BA for New Manufacturing Companies
Support for New Manufacturing Companies: Section 115BA offers significant support for newly established manufacturing firms, particularly those incorporated after October 1, 2019. By providing a lower tax rate of 15%, this section incentivizes new businesses to establish manufacturing operations and contribute to India's economic growth.
Attractive for Foreign Investors: The preferential tax rate and additional benefits under Section 115BA make it appealing for foreign investors to invest in new manufacturing enterprises in India, potentially increasing foreign direct investment (FDI) and generating job opportunities for the local workforce.
Tax Savings: The reduced tax rate of 15% can lead to considerable tax savings for new manufacturing companies, especially in their early years of operation. This financial relief can enable them to allocate more resources towards business growth and development.
Simplified Tax Compliance: The criteria for availing the benefits of Section 115BA are clear-cut, making it easier for new manufacturing companies to adhere to tax regulations. This simplicity can save them valuable time and effort, which can be redirected towards expanding their business.
No MAT and DDT: The exemption from MAT and DDT under Section 115BA presents a significant benefit for new manufacturing companies, allowing them to maintain a healthy cash flow and reinvest in their operations.
Conclusion
To stimulate the manufacturing sector in India, new manufacturing enterprises can benefit from a tax structure with concessions under Section 115BA of the Income Tax Act. This section's provisions provide a range of advantages and incentives to boost growth and stimulate investment. Before choosing this regime, you should carefully consider the requirements and qualifying criteria for these advantages. To comprehend the effects of this section on the company's tax liabilities and business activities, it is advisable to speak with a tax specialist.
FAQ
Q1. What is Section 115BA of the Income Tax Act?
The Income Tax Act has a provision called Section 115BA that offers new manufacturing businesses in India a tax structure with concessions. It permits qualified businesses to pay a 15% tax on their whole income (plus a surcharge and cess).
Q2. Who can get the benefits under Section 115BA?
Benefits under Section 115BA are available to newly formed manufacturing enterprises that incorporate after October 1, 2019, and start operating before April 1, 2023.
Q3. From which assessment year did Section 115BA became applicable?
The Income Tax Act of 1961's Section 115BA is in effect as of the 2017–2018 Assessment Year. Nevertheless, as of Assessment Year 2020–2021, certain subsections of Section 115, namely Section 115BAA and Section 115BAB, are operational.
Q4. What are the conditions businesses need to fulfill to avail of the benefits under Section 115BA?
The newly formed manufacturing company must fulfil a number of requirements, including being incorporated after October 1, 2019, but before April 1, 2023, and refrainfrom conducting any business other than the manufacture or production of goods.
Q5. How long is Section 115BA applicable?
Qualifying new manufacturing enterprises are subject to a concessional tax rate of 15% (plus surcharge and cess for the first ten years after the year of operations.
Q6. Can new manufacturing companies carry forward or set off their losses under Section 115BA?
No, under Section 115BA, newly established manufacturing enterprises are not permitted to deduct or carry forward any losses from prior years. They are able to deduct and carry forward the depreciation allowance, nevertheless.
Q7. What is the primary objective of Section 115BA of the Income Tax Act?
By offering a favourable tax structure to qualified new manufacturing enterprises, Section 115BA seeks to promote investment and accelerate the expansion of India's manufacturing industry.
Q8. What is Section 115BA(4) of the Income Tax Act?
The Income-tax Act, 1961 (ITA) Section 115BA(4) application gives the option to pay income tax at a rate of 25% on the entire income. This is given if the assessee meets the predetermined requirements.
Q9. Does MAT apply to taxation under Section 115BA?
Yes, under Section 115BA, there is a minimum alternate tax that applies, and manufacturing enterprises are responsible for paying it. According to the Income Tax Act, these businesses must pay 15% MAT. MAT is not applicable under Sections 115BAA and 115BAB.
Q10. How does the eligibility to file taxes under Section 115BA and Section 115BAA differ?
Only domestic companies that produce goods in this nation are subject to Section 115BA. However, under Section 115BAA of the Income Tax Act, 1961, all enterprises that operate in India are free to file their taxes.
Q11. Is the basic tax rate under Section 115BAA the same as that under Section 115BA?
The basic rate under Section 115BA is 25%. For businesses reporting taxes under Section 115BAA of the Income Tax Act, this rate is different. The basic tax rate for the companies is 22%. All Indian firms are subject to Section 115BAA.
Q12. What types of companies are eligible for benefits under Section 115BA?
Companies incorporated after October 1, 2019, and which commence manufacturing or production on or before March 31, 2023, are eligible.
Q13. What are the tax benefits offered under Section 115BA?
Eligible companies can opt for a lower corporate tax rate of 15%, subject to certain conditions and exemptions.
Q14. Is there any sunset clause for availing benefits under Section 115BA?
Yes, companies must commence manufacturing or production activities on or before March 31, 2023, to avail the benefits under this section.
Q15. Can companies availing benefits under Section 115BA claim any deductions or exemptions?
No, companies opting for the concessional tax regime under Section 115BA cannot claim any deductions or exemptions.
Q16. Are there any specific reporting requirements for companies opting for Section 115BA?
Yes, companies need to disclose their option for the concessional tax regime under Section 115BA in their income tax returns and financial statements.
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