Compliances of notice under IT Act

INCOME TAX ACT

Section 115BAB- New Corporate tax rate for new manufacturing companies

The government, via Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019, has introduced a favourable new corporate tax rate for new manufacturing companies. It has inserted Section 115BAB offering a low corporate tax rate of 15% (plus surcharge and Health and Education Cess) making an effective rate of 17.16% to new manufacturing companies.

ELIGIBILITY FOR NEW CORPORATE TAX BENEFITS UNDER SECTION 115BAB

The benefits of the section can be utilized by Domestic companies and no other entity. However, there are some conditions attached which are explained below:

• The domestic company should have been set-up and registered on or after the 1^st October 2019, and has commenced manufacturing or production of any article or thing on or before the 31^st march 2013

Analysis; The government has introduced this section with an intention to favor the economic growth of the country.

The secondary sector growth is vital for boosting the GDP growth and hence it is beneficial for the both the economy and the corporate giving them a much- needed incentive to open up units of production and manufacturing .

• The business should not be formed by splitting up, or the reconstruction, of a business already in existing (not applicable to a business referred in sec 33B of IT Act, 1961)

Analysis; splitted-up or Reconstructed businesses would not necessarily mean an addition to the existing production value being generated by the Company.

A newly setup entity would, on the contrary, mean that there is a supplementary production taking place in the country adding to the GDP growth. 

The company should not use any machinery or plant previously used for any purpose. However, there are few exceptions to this condition which as follows:

• Any Plant and machinery which has been imported to India from anywhere outside the country and the same is not used in India prior to the date on installation
• Plant and machinery or part thereof which has been used before but the value of which, does not exceed 20% of the total value of the machinery or plant used by the company
• The deduction should have been allowed on account of depreciation in respect of plant or machinery at any previous time before installation

Analysis; The intension behind attaching this particular condition is that the government intents and expects companies to invent more capitalize in the form of plant and machinery and other fixed assests.

• The company cannot use any building previously used as a hotel or a convention centre as the case may be, in respect of which deduction under Section 80-ID of I.T Act, 1961has been claimed and allowed. 

As per the definition in Section 80-ID “hotel” and “convention centre” as been defined respectively: 
“hotel” means a hotel of two-star, three-star or four-star category as classified by the Central Government; 
“convention centre” means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, as may be prescribed; 

1. The company should not be engaged in any business other than: 
2. The business of manufacture or production of any article or thing  
3. Research in relation to the manufacturing or production of article or thing 
4. Distribution of such article or thing 

UNDER THIS NEWLY INSERTED SECTION 115BAB BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING DOES NOT INCLUDE THE FOLLOWING BUSINESS: 

• Development of computer software in any form or in any media
• Mining
• Conversion of marble blocks or similar items into slabs
• Bottling of gas into a cylinder
• Printing of books or production of a cinematograph
• Any other business as may be notified by the central government in the behalf;

Analysis: By inserting this condition it is clarified that the section is only meant to benefit the manufacturing and production industry and activities carried on for facilitating the research and distribution of the same.  

It has also listed out business that may create confusion regarding their status to whether they would qualify and be eligible for this section.

THE INCOME TAX OF THE COMPANY SHOULD BE COMPUTED WITHOUT CLAMING FOLLOWING TAX EXEMPTIONS AND DEDUCTION:

• Section 10AA: Deduction for units in special Economic zone
• Section 32: Deduction for additional depreciation under and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and west Bengal.
• Section 33AB Deduction for tea, coffee and rubber manufacturing companies
• Section 33ABA Deduction towards deposits made towards site restoration fund by companies engaged in extraction or production of petroleum or natural gas or both in India
• Section 35: Deduction for expenditure made for scientific research
• Section 35AD: Deduction for the capital expenditure incurred by any specified business
• Section 35CCC: Deduction for the expenditure on an agriculture extension project
• Section 35CCD: Deduction for a skill development project
• Deduction under Chapter VI –A in respect to certain incomes, which are allowed under section 80AI, 80IAB, 80IAC, 80OIB and so on ], except deduction under section 80JJAA and 80M (amendment brought in by finance Bill 2020)

Analysis: A few deduction and exemptions have been retracted by the government as the company is already benefitting from the concessional tax rate and to avoid double benefits to the company the necessary condition has been inserted.

NOTE-set-off of losses and unabsorbed Depreciation cannot be claimed where such loss or depreciation is attributable to the deductions enlisted above while computing Total Income of the company.

NOTE- While computing Total income of the company, Depreciation under the provision of section 32 can be claimed but Additional Depreciation under clause (iia) of sub- section (1) of the said section cannot be claimed 

WHEN CAN THE COMPANY AVAIL THE BENEFIT OF SECTION 11BAB?

The company has to exercise the option on or before the due date of filling income tax returns i.e. usually 30^th sep of the assessment year.

Once the company opts for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.

WHAT DOES THE SECTION SAY REGARDING TRANSFER PRICING AND REALTED PARTY TRANCTIONS?

If there appears to the Assessing officer that there is a close connection between the Company and any other person, and the course business between them is so arranged that the business transacted between them produces to the person more than the ordinary profits which might be expected to arise in such business, the Assessing officer shall in computing the profits and gains of such business for the purposes of this section, take the number of profits as may be reasonably deemed to have derived therefore.

In case of the aforesaid arrangement involves the specified domestic transaction referred to in section 92BA, the number of profits from such transaction shall be determined having regard to arm’s length price.

Conclusion:

It’s a great incentive for the new manufacturing companies provided by the government.

However, one should make an in- depth study in the light of the deductions and exemptions the company would have to forego in order to avail the benefit of the concessional tax rate.