Section 115BA of the Income Tax Act – Section 115BA for New Manufacturing Companies

The Government of India has continuously introduced policies to strengthen the country’s manufacturing sector. A significant move in this direction was the introduction of Section 115BA of the Income Tax Act through the Union Budget of 2016. This section was crafted to provide concessional tax benefits to new domestic manufacturing companies. By reducing the tax liability of eligible companies, Section 115BA aims to foster industrial growth, increase foreign investments, and generate employment. The section has evolved with time, and its relevance is evident for businesses formed after October 1, 2019. This article explains all the important provisions, eligibility criteria, exemptions, and benefits in simple language for better understanding.

Section 115BA of the Income Tax Act

Section 115BA of the Income Tax Act outlines a concessional tax regime for domestic manufacturing companies. As per the provision, eligible companies can opt to pay income tax at a reduced rate of 25% (exclusive of surcharge and cess) if they meet specific conditions outlined in Chapter XII of the Act, excluding Sections 115BAAA and 115BAB. This section is applicable to companies that have been formed after October 1, 2019, and have commenced operations on or before April 1, 2023. Moreover, Section 115BA allows companies to transition to Section 115BAB after utilizing all brought-forward losses. This flexibility provides companies with more control over their tax planning.

Eligibility Criteria for Section 115BA: Conditions to be Fulfilled

To avail of the benefits of Section 115BA, companies must meet certain conditions.

• The company must be a domestic manufacturing company incorporated on or after March 1, 2016. This means the entity must be registered and formed for manufacturing or producing goods.

• The company must not be engaged in any non-manufacturing business activities. Only those involved in the production or creation of articles or things qualify. The business activities can include the research, development, and distribution of manufactured goods.

• The company must not have claimed benefits under other provisions of the Income Tax Act, such as Sections 10AA to 80TT. This includes deductions like 32AD (investment in backward areas), 33AB (tea/rubber/coffee development), and many others. Companies claiming such benefits are excluded from opting under Section 115BA.

• Also, the company cannot claim deductions under Chapter VI-A under the category "C—Deductions in respect of certain incomes."

• The choice to opt for Section 115BA must be made on or before the due date for filing the income tax return. It must be filed using Form 10-IB, and this form needs to be submitted online either with a digital signature or through an Electronic Verification Code (EVC).

Some exceptions exist under Section 115BA. Companies involved in activities such as mining, bottling gas into cylinders, book printing or film production, marble block conversion, and other specified activities as notified by the Central Government are not eligible.

List of Deductions Not Allowed Under Section 115BA

Under Section 115BA, several deductions are disallowed. Companies opting for this section cannot claim these deductions while computing taxable income.

• One such disallowed deduction is under Section 10AA for Special Economic Zones (SEZ) units. Companies operating in SEZs cannot avail of benefits under both Section 115BA and Section 10AA.

• Investments made in new machinery and plant in backward regions of Andhra Pradesh, Bihar, Telangana, and West Bengal under Section 32AD are also not eligible.

• Similarly, deductions under Section 33AB for expenses on the development of coffee, tea, and rubber plantations are not allowed.

• Contributions made to the site restoration fund under Section 33ABA by companies engaged in the extraction of petroleum and natural gas in India are also excluded.

• Research-related deductions under Sections 35(1)(ii), (iia), (iii), 35(2AA), 35(2AB), and Section 35AC are not allowed either.

• Further, deductions under Section 35AD for capital expenditure by specified businesses, Section 35CCC for agricultural extension projects, and Section 35CCD for skill development projects are restricted.

• Additional depreciation under Section 32 is also excluded.

• All deductions under Sections 80H to 80TT are disallowed, except for Section 80JJAA (which pertains to employment of new workers).

• Moreover, any losses related to these restricted deductions from previous years cannot be set off or carried forward.

Tax Rates Under Section 115BA

• As per Section 115BA of the Income Tax Act, a domestic manufacturing company that qualifies for this section can opt to pay a tax rate of 25%. This rate applies to companies formed on or after March 1, 2016, and involved solely in the manufacturing or production of goods.

• In addition to the basic tax rate of 25%, a surcharge of 7% is applicable if the total income exceeds INR 1 crore. If the income surpasses INR 10 crore, the surcharge increases to 12%.

• A health and education cess at the rate of 4% is levied on the total of income tax and surcharge.

• It is also important to note that a Minimum Alternate Tax (MAT) of 15% is applicable under Section 115BA. However, MAT is not applicable under the alternative tax provisions Section 115BAA and 115BAB.

How Do New Manufacturing Companies Benefit from Section 115BA?

• New manufacturing companies opting for Section 115BA can avail of a reduced tax rate of 15% (plus surcharge and cess) if they fulfill all the required conditions. This special tax rate is applicable for the first 10 years from the year in which the company starts its operations.

• The lower tax rate helps companies retain more earnings in the initial years. These savings can be reinvested in business expansion, product development, and technological upgrades.

• The provision specifically targets companies that started after October 1, 2019, to provide a boost to fresh investment in the manufacturing sector. This in turn can help create more jobs and foster industrial development.

• Section 115BA also serves as an incentive for foreign investors. With the promise of lower tax liability, international businesses find it more attractive to invest in India’s manufacturing domain, which can increase the flow of foreign direct investment (FDI).

Advantages of Section 115BA

• Section 115BA of the Income Tax Act provides significant tax relief for new manufacturing companies. The most important advantage is the concessional tax rate of 15% (plus surcharge and cess) for the first 10 years of business operations.

• Another key advantage is the exemption from deductions under Chapter VI-A. Although the company cannot claim such deductions, the simplicity in tax calculations helps in reducing compliance burdens.

• Companies under Section 115BA are not allowed to set off or carry forward business losses related to disallowed deductions. However, they can still carry forward depreciation, which provides some flexibility in tax planning.

• MAT is applicable under Section 115BA, but companies can choose to switch to Section 115BAB in later years to get an exemption from MAT, once their carried-forward losses are utilized.

• Dividend Distribution Tax (DDT) is not applicable to companies opting under Section 115BA, which is a major benefit for companies that regularly distribute dividends to shareholders.

Benefits of Section 115BA for New Manufacturing Companies

The following are the benefits of Section 115BA for New Manufacturing Companies:

• Section 115BA extends strong support to new manufacturing companies incorporated after October 1, 2019. By offering a reduced tax rate of 15%, this section makes it economically viable to start new manufacturing ventures.

• The lower tax rate helps in improving profitability during the early growth phase, which is important for sustainability.

• For international companies looking to enter the Indian market, the reduced tax burden under Section 115BA provides a favorable business environment and encourages setting up operations in India.

• By saving on taxes, companies can redirect funds towards business development, R&D, employment generation, and market expansion.

• With no obligation to pay MAT and DDT in later years under Section 115BAB, companies gain a long-term advantage in terms of tax compliance and financial planning.

Conclusion

Section 115BA of the Income Tax Act is an important provision for encouraging industrial development in India. It offers a beneficial tax regime for new manufacturing companies with clear eligibility conditions and defined tax advantages. Companies planning to opt for this regime must carefully assess their eligibility and ensure compliance with all conditions. Consulting with tax professionals is advisable for understanding the full implications of choosing this option. By leveraging Section 115BA effectively, companies can strengthen their financial footing and contribute to the nation’s manufacturing growth.

For more details or a free consultation, visit Compliance Calendar LLP official website and connect with their expert advisors.

Email: info@ccoffice.in

Call/Whatsapp: +91 9988424211

Frequently Asked Questions

Q1. What is Section 115BA of the Income Tax Act?

Ans. Section 115BA offers new manufacturing businesses a concessional tax rate of 15% (plus surcharge and cess), subject to certain conditions.

Q2. Who is eligible for Section 115BA benefits?

Ans. New domestic manufacturing companies incorporated after October 1, 2019, and which commence production before April 1, 2023, can claim the benefits.

Q3. From when is Section 115BA applicable?

Ans. Section 115BA is effective from Assessment Year 2017-18, while related provisions such as Section 115BAA and 115BAB are applicable from AY 2020-21.

Q4. What are the main conditions for opting under Section 115BA?

Ans. The company must only be engaged in manufacturing, must not claim other specified deductions, and must file Form 10-IB before the due date.

Q5. How long does the concessional tax rate apply under Section 115BA?

Ans. The 15% tax rate (plus surcharge and cess) applies for the first 10 years from the commencement of business operations.

Q6. Can companies carry forward or set off losses under Section 115BA?

Ans. No, carry forward or set-off of losses related to disallowed deductions is not permitted. However, depreciation can be carried forward.

Q7. What is the objective of introducing Section 115BA?

Ans. The section aims to boost investment in the manufacturing sector and promote job creation by offering a lower tax rate.

Q8. What is Section 115BA(4) of the Income Tax Act?

Ans. Section 115BA(4) allows companies to opt for a 25% tax rate if they fulfill the specific eligibility criteria.

Q9. Is MAT applicable under Section 115BA?

Ans. Yes, MAT at 15% is applicable under Section 115BA. It is not applicable under Section 115BAA and 115BAB.

Q10. How is Section 115BA different from Section 115BAA?

Ans. Section 115BA is available only to manufacturing companies. In contrast, Section 115BAA applies to all domestic companies and offers a 22% tax rate.

Q11. What is the tax rate under Section 115BAA?

Ans. The base tax rate under Section 115BAA is 22%, and it is applicable to all Indian companies regardless of their line of business.

Q12. What companies qualify for Section 115BA?

Ans. Companies incorporated after October 1, 2019, and commencing production before March 31, 2023, qualify.

Q13. What is the main tax benefit under Section 115BA?

Ans. The primary benefit is the reduced corporate tax rate of 15% plus surcharge and cess.

Q14. Is there a sunset clause for availing Section 115BA benefits?

Ans. Yes, companies must start manufacturing on or before March 31, 2023.

Q15. Can deductions and exemptions be claimed under Section 115BA?

Ans. No, all specified deductions and exemptions are not allowed under Section 115BA.

Q16. Are there any reporting obligations for companies opting for Section 115BA?

Ans. Yes, companies must report their choice to opt for Section 115BA in their ITR and financial statements.