Section 115 BAB of Income Tax Act

Section 115 BAB of the Income Tax Act is a special provision introduced by the Indian government to promote new manufacturing companies. It offers these companies a corporate concessional tax rate of 15% (excluding surcharge and cess).

To qualify, companies must be incorporated on or after October 1st, 2019 and begin manufacturing on or before March 31st, 2024. The goal is to boost India’s manufacturing sector by making it more attractive for businesses to set up operations in the country.

However, companies opting for this reduced tax rate cannot claim other deductions or exemptions under the Income Tax Act, including those related to the minimum alternate tax (MAT).

This provision is a part of the government’s border efforts to drive economic growth, support job creation and enhance industrial investments under initiatives like ‘Make in India’. By lowering tax obligations, section 115 BAB encourages businesses to invest in India's manufacturing capabilities and contribute to economic development in the country.

To benefit from the reduced tax rate under section 155 BAB of the Income Tax Act, a company must meet several section 115 BAB eligibility criteria. Here is a simplified breakdown:

-Must be a new manufacturing company- The company must be incorporated in India on or after October 2019 and must start manufacturing operations on or before March 31st 2024.

-Must not be a rebuilt business- The company should not be created by splitting or reconstructing an existing business. However, reorganisations under section 33 B of the Income Tax Act are allowed.

-No previously used buildings- The company cannot use a building that was previously used as a hotel or convention centre, as per section 80-ID.

-No previously used machinery- The company must not use machinery that has been used for any purpose in India, except for imported machinery that has not been used in the country before.

-Income calculation restrictions- The company's total income must be calculated without claiming certain deductions, such as :

• Deductions under chapter VI-A ( except sections 80 JJAA, 80 M and 10 AA)

• Additional depreciation under section 32(1)(iia)

• Investment allowance under section 32 AD

• Deductions for specific business expenses under sections 33 AB, 33 ABA, 35, 35 CCD and 35 AD

-Net set-off for past losses- If a company has any carried forward losses or unabsorbed depreciation related to deductions under Chapter VI-A or Section 10 AA, it cannot claim these as a set-off against income

-Filing of return- The company must file its income tax return along with form 10- 1D to claim the benefits of this section and once the option is chosen it cannot be withdrawn in later years.

Under section 115 BAB of the Income Tax Act, new manufacturing companies benefit from a reduced tax rate of 17.16% effective from FY 2019-20. This tax rate encourages the establishment of new manufacturing units in India. Here is a breakdown of the effective tax rate:

Except for deductions under section 80 JJAA that are related to hiring new employees, the company cannot claim any other deductions or allowances under the Income Tax Act.

• The company is prohibited from utilising any exemptions or incentives provided by other sections of the Income Tax Act.

• The company must not be enhanced in any business activities described under Section 115 BAB (4), which lists businesses that do not qualify for the tax benefits.

• The company cannot claim any brought forward losses or unabsorbed depreciation from prior assessment years.

• The company must not be eligible for the concessional tax rate offered under 115 BA, which applies to firms in specific businesses.

Certain businesses are not considered as manufacturing or producing an article or things under section 115 BAB. These include:

• Development of computer software, regardless of the form or media

• Mining activities

• Conversion of marble blocks or similar items into slabs

• Bottling of gas into cylinders

• Printing books or producing cinematograph films.

The transfer pricing provisions under section 115 BAB apply when a company earns more than ordinary profits due to a close connection with another person or for any specific reason. In such cases, the assessing officer (AO) can ignore the excess profits and only consider the amount that is reasonably derived from the business.

If the business transaction involves a specified domestic transaction as it is defined under section 92 BA, the profits from this transaction must be determined based on the arm’s length pricing. This means that the pricing of the transaction should be similar to what it would be if the two entities were independent and not related.

In simpler terms, the company cannot benefit from inflated profits due to its relationship with another person or entity. The arm’s length price ensures fairness and prevents manipulation of profits.

The assessing officer will follow the transfer pricing rules that have been outlined in section 92 F to ensure that any specified domestic transactions are properly assessed and only genuine profits are taken into account. This mechanism ensures transparency and prevents companies from artificially inflating profits through related-party transactions.

Section 115 BAB of the Income Tax Act offers a significant tax advantage to newly established manufacturing companies in India. By providing a reduced tax rate, the provision aims to stimulate growth, attract investments and promote job creation in the manufacturing sector.

To qualify for this benefit, companies must meet specific eligibility criteria, including being a new domestic manufacturing entity, starting operations within a specified timeframe and adhering to certain restrictions on deductions and exemptions. By carefully considering the requirements and potential benefits, businesses can evaluate whether Section 115 BAB is a suitable option for their tax planning.

However, it is crucial to consult with a tax professional to ensure an accurate understanding and compliance with the provisions of Section 115 BAB. A qualified tax advisor can provide tailored guidance on your specific circumstances and help make informed decisions regarding tax optimisation.

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