Section 115 BAB of Income Tax Act –  Eligibility Criteria, Tax Rate for Domestic Manufacturing Companies, and Section 115 BAB Transfer Pricing

Introduction

The Ministry of Finance has adopted Section 115BAA and Section 115BAB taxation legislation for domestic and domestic manufacturing firms that begin operations on or after October 1st, 2019 and before March 31st, 2023. The sections were created to aid startups by lowering corporate tax rates for domestic and manufacturing businesses. In this article information on Section 115 BAB of Income Tax Act, Eligibility Criteria for Section 115 BAB under Income Tax Act, Tax Rate for domestic Manufacturing Companies, and Section 115 BAB transfer pricing.

Section 115 BAB of Income Tax Act

The Income-tax Act of 1961 introduced Section 115BAB.  The Ministry of Finance introduced Section 115 BAB to give domestic manufacturing enterprises the option of paying 15% tax (Excluding Surcharge and Cess). Companies that opt for a lower tax rate will no longer be eligible for government discounts or incentives. For firms eligible to profit from Section 115BAB, the Ministry of Finance offers the option of filing taxes with or without the concessional tax.

The introduction of Section 115BAB will aid in the expansion of economic activity and job prospects. It will also aid in the expansion of liquidity, investment, and production. As a result, the stakeholders’ profit and disposable income increase, resulting in greater demand and consumption.

Tax Rate for Domestic Manufacturing Company

Eligibility Criteria for Section 115 BAB under Income Tax Act

From the Financial Year 2019-20 (AY 2020-21) onwards, section 115BAB of the Income Tax Act applies to all domestic corporations, save those that have chosen a concessional rate of tax under section 115BA or 115BAA, subject to specified criteria.

• The company was formed and registered on or after October 1,2019, and manufacturing began on or before March 31,2023. A firm of this type should:

1. 1. Except in the event of a firm being re-established under section 33B, it cannot be constituted by dividing up and reconstructing an existing enterprise.
   2. Does not use any previously used (second hand) plant or machinery for any purpose. The corporation can, however, use plant and machinery that were previously used outside of India and are now being used in India for the first time. In addition, the company can use obsolete plant and machinery whose worth does not exceed 20% of the overall value of the company’s plant and machinery.
   3. It will not be housed in a facility that was previously used as a hotel or convention center. A hotel is defined as a two-star, three-star, or four-star establishment as defined by the Central Government. ‘Convention center’ refers to a structure of a specified size and number of convention halls for the purpose of holding conferences and seminars, as well as any other facilities and amenities that maybe required.

• The corporation should be in the business of producing or manufacturing any article or thing, as well as conducting research on such an article or thing. The corporation may also be involved in the distribution of the item or object that they have manufactured or produced.
• Without accounting for tax deductions and incentives, the company’s total income should be estimated as follows:

1. 1. Units in a Special Economic Zone are eligible for a deduction under section 10AA.
   2. Section 32 deduction for additional depreciation and section 32AD investment allowance for new plant and machinery purchased in identified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal.
   3. Tea, coffee, and rubber manufacturers are eligible for a deduction under section 33AB.
   4. Companies engaged in the extraction or production of petroleum, natural gas, or both in India can deduct deposits made to the site rehabilitation fund under section 33ABA.
   5. Section 35 deduction for expenditures for scientific research
   6. Section 35AD provides a deduction for capital expenditures incurred by any specified business.
   7. Deduction for expenses made on a section 35CCC agriculture extension project or a section 35CCD skill development project.
   8. Deduction under Chapter VI-A for various incomes authorised under sections 80IA, 80IAB, 80IAC, 80IB, and so on, with the exception of the deduction allowed under section 80JJAA.
   9. Set-off any losses carried forward from previous years if they were incurred in connection with those mentioned above deductions.
   10. Depreciation deduction under section 32, with the exception of the additional depreciation specified above.

Salient features of Section 115 BAB of Income Tax Act

• The new provision section 115BAB has been inserted by the Ordinance in the Income Tax Act with effect from the financial year 2019-2020 in order to stimulate investment in manufacturing and to boost the government’s “Make in India” initiative.
• Any domestic firm incorporated on or before October 1,2019, that makes a manufacturing investment has the option of paying income tax at a rate of 15% under Section 115BAB.
• The benefits under Section II5BAB apply to businesses who do not qualify for any exemptions or incentives and begin production before or on March 31,2023.
• Furthermore, such businesses are exempt from paying the Minimum Alternate Tax (MAT).

Section 115 BAB transfer pricing provision

The Assessing Officer may dismiss excess profits if the company earns more than the ordinary profits due to a close relationship between the company and another individual or for any other reason. Only the amount of profits reasonably deemed to be obtained from the business will be taken into account by the assessing officer.

If a commercial transaction involves a specified domestic transaction as defined in section 92BA, the transaction’s profits will be calculated using the arms-length pricing.

Conclusion

The advantage of section 115BAB can be claimed by a domestic manufacturing company that meets the conditions outlined in Sub Section of the Income Tax. A domestic manufacturing is one that is incorporated and registered in India. The new effective tax rate for domestic manufacturing taking use of the 115BAB benefit is 17.16 percent.