Corporate India is anxiously anticipating clear guidelines regarding a potential extension to the sunset period for accessing the discounted tax rate of 15 per cent applicable to companies establishing new manufacturing units.
Numerous industry associations have formally requested the Finance Ministry to consider a three-year extension to the concessional tax framework, set to conclude on March 31 this year.
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Insiders reveal that there are lingering uncertainties surrounding various aspects of the scheme, and it remains uncertain whether the forthcoming interim Budget, scheduled for presentation next month, will address these concerns and provide the sought-after clarity.
The scheme has been well recognised with some corporates setting the new capacities or subsidiaries to claim the concessional tax rates.
A 1-year extension is not enough provided that two years of COVID-19 as well as the capital-intensive nature setting manufacturing the plant.
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Numerous international corporations are exploring opportunities to establish their presence in India, and a well-timed extension would serve as an additional incentive for them.
Positive Impact on Tax Rates
Despite the discounted tax rates of 15 per cent for new manufacturing companies and 22 per cent for other corporate entities, corporate income tax collections in January witnessed a noteworthy year-on-year net growth of 12.37 per cent.
The reduced tax rates have had a positive impact on government revenues, providing a stimulus to the industrial and manufacturing sectors, particularly benefiting MSMEs. These rates complement other schemes and initiatives introduced by both the Central and State governments, stated a tax expert.
Tax experts advocate for extending the sunset period by at least three years to allow the business community to plan effectively.
All companies, regardless of their incorporation date, should be eligible for participation, contingent on criteria such as an increase in existing production capacity or investment in new manufacturing facilities. Additionally, segments related to manufacturing, such as simulation services and testing services, should be included in the scope, suggested a tax expert.
Currently, companies must satisfy specific criteria to qualify for the reduced tax rate. For instance, a company can utilize old plant and machinery, but the value of such assets should not exceed 20 per cent of the total value of the plant and machinery in use.
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Several aspects require clarification. For example, it is uncertain whether the provisions will extend to additional capacities added later, and whether the benefit will apply to the establishment of manufacturing plants for different products.
In filing tax returns, companies are obligated to indicate the date of production commencement. This requirement might pose challenges as, in most instances, production would not have commenced by the time the initial income tax return is submitted, according to experts.
The law stipulates a 22 per cent tax rate on incomes generated within the same company that is not incidental or ancillary to the manufacturing business.
This was intended to encompass incomes of a nature like interest, earned by the company. Will the same rate apply to other income streams such as trading sales or AMC incomes earned by the company? Clarity on this matter would be beneficial, expressed the tax expert.
An Intervention is Needed
In 2019, a tax rate of 15 per cent (17.16 per cent after surcharge and cess) was introduced under Section 115BAB for newly established manufacturing companies.
Originally set for March 31, 2023, the deadline to benefit from the lower rates was subsequently extended by a year.
The industry advocates for an additional three-year extension to the sunset period.
Corporate income tax collections in January exhibited a year-on-year net growth of 12.37 per cent.
