Tax Connect

A domestic company satisfying the specified conditions mentioned in (2) below can claim the benefit of section 115BAB. Domestic company includes a company formed and registered in India. The benefit is available from the financial year 2019-20 (AY 2020-21).

A domestic company will be entitled to the benefit of low corporate tax rate if it satisfies the following conditions:

1. The company has been set up and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023. Such a company should:
   • Not be formed by the splitting up and reconstruction of a business already in existence except in case of a business re-established under section 33B
   • Does not use any plant or machinery previously used for any purpose. However, the company can use plant and machinery used outside India and used in India for the first time. Also, the company can use old plant and machinery, the value of which does not exceed 20% of the total value of the plant and machinery used by the company.
   • Does not use a building previously used as a hotel or a convention centre.‘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.
2. The company should be engaged in the business of manufacture or production of any article or thing, and research in relation to such article or thing. The company can also be engaged in the distribution of such article or thing manufactured or produced by it.
3. business of manufacture or production of any article or thing referred to in clause (b) shall not include business of,—

(i)development of computer software in any form or in any media;

(ii)mining;

(iii)conversion of marble blocks or similar items into slabs;

(iv)bottling of gas into cylinder;

(v)printing of books or production of cinematograph film; or

(vi)any other business as may be notified by the Central Government in this behalf; and

4. The total income of the company should be calculated without claiming tax exemptions and incentives:
   • Deduction under section 10AA for units in Special Economic Zone
   • Deduction for additional depreciation under section 32 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
   • Deduction under section 33AB for tea, coffee and rubber manufacturing companies
   • Deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both in India
   • Deduction for expenditure made for scientific research under section 35
   • Deduction for the capital expenditure incurred by any specified business under section 35AD
   • Deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD
   • Deduction under Chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA (List at end)
   • Set-off of any loss carried forward from earlier years if such losses were incurred in respect of the aforementioned deductions
5. by claiming the Deduction for depreciation under section 32, except the additional depreciation as mentioned above

The new effective tax rate, which will apply to domestic companies availing the benefit of section 115BAB is 17.16%. 

Such companies will not be required to pay minimum alternate tax (MAT) under section 115JB of the act. 

   Anti Abuse Provisions under Section 15BAB

The anti abuse provisions are contained under sub-section (6) of Section 115BAB.

Such anti abuse provisions can be divided into the following categories: –

1. Related Party Transaction and transfer pricing adjustments

2. Taxability at higher rate

Related Party Transactions & Transfer Pricing

According to section 115BAB(6), where the assessing officer is satisfied that owing to the close connection with any person the transactions are so arranged, that they result in the company having greater profits that would otherwise accrue, AO may determine such profits on reasonable means.

In case such transactions are greater than the limit specified for domestic transfer pricing, such profits will be determined having regard to the arms length price for such transactions.

Hence transactions between companies claiming lower rate under this section and other group and related parties must be at arm’s length or reasonable basis and not in a manner to evade or reduce tax liability for the group as a whole.

Taxability at higher Income Tax rates

From the reading of the provisos to sub section (1) of section 115BAB, the following can be inferred: –

1. Adjustment to profits as mentioned above will be taxed at 30% rate of income tax

2. Any income derived from other business activities apart from manufacture or production of an any article or thing or research or distribution related thereto, shall be taxed at 22% rate of income tax and no deduction of any expenditure will be allowed against such income.

3. Short term capital gains on which depreciation is claimed shall be taxable at 22% tax rate.

4.  If in any previous year the conditions mentioned in this article, are not satisfied, on and from the AY relevant to such previous year, the option of lower tax rate shall cease to apply.