Reduced Tax Rate Benefits for New Manufacturing Companies in India

Introduction

To bolster manufacturing in India and aid small and medium enterprises (SMEs), the government has established a reduced tax rate for manufacturing companies. This article outlines the relevant criteria, effective dates, and essential factors that businesses should consider to take advantage of this initiative.

Applicability

The reduced tax rate is applicable to domestic companies that meet the following requirement:

• New Incorporation: The company must be formed and registered in India after October 1, 2019.

Effective Date

This tax reduction is effective from the Financial Year (FY) 2019-20. Companies established post-October 1, 2019, must commence their manufacturing operations by March 31, 2024, to be eligible.

Tax Rate Breakdown

• Effective Tax Rate: 17.16%
  • Base Tax Rate: 15%
  • Surcharge: 10%
  • Cess: 4%

The 10% surcharge under Section 115BAB applies regardless of the income level, differing from the standard surcharge rates (7–12%) for other companies. New entities formed after October 1, 2019, will be subject to the standard corporate tax rate of 25% if manufacturing operations do not begin by the specified date.

Section 44BBD: This section, introduced in the Budget 2025, pertains to a presumptive taxation scheme for non-residents supplying technology/services to Indian electronics manufacturers, assigning 25% deemed income.

Important: Companies must opt for the reduced tax rate before filing their tax return for the relevant fiscal year. This decision is irrevocable for that year.

Criteria for Eligibility

To qualify for the reduced tax rate, companies must satisfy the following criteria:

1. Company Formation:

   • The entity must be newly established and not formed through the division or reconstruction of an existing business.

2. New Plant and Machinery:

   • All machinery must be brand new and cannot have been previously used for any purpose.
   • Machinery sourced from outside India is acceptable.
   • Indian machinery may be included if its cost does not exceed 20% of the total machinery expense.

3. Operational Premises:

   • The company must not operate from facilities that were previously hotels (3-star, 4-star, or 5-star).
   • Locations used for seminars and workshops are also disqualified.

Exemptions Not Applicable

By opting for the reduced tax rate, companies waive certain tax exemptions, including:

• Set-off and carry forward of prior period losses.
• Deductions under Chapter VIA.
• Depreciation according to Section 32.
• Expenses directed toward scientific research.
• Capital expenditures linked to specified businesses.
• Deductions for tea, coffee, and rubber companies.
• Other deductions, such as those for agriculture or site restoration, are not allowed.

Note on Minimum Alternate Tax

It is important to highlight that the Minimum Alternate Tax (MAT) does not apply to companies utilizing the reduced tax rate, thereby offering an additional advantage.

Conclusion

The newly introduced tax rate offers substantial benefits for manufacturing firms that forego the listed exemptions. Small manufacturing companies, particularly in sectors like plastics or packaging that do not claim special deductions, may find the reduced tax rate of 17.16% advantageous. Businesses should evaluate tax planning strategies in relation to both the standard 25% corporate tax rate and the new reduced rate to identify the most beneficial option. Remember, once the reduced rate is chosen, it cannot be altered for that financial year.