India: Concessional “Make in India” tax rate – Catch it, before it expires

published on 17 May 2023 | reading time approx. 4 minutes

“Make in India” initiative was launched by the Government of India back in 2014 with a view to boost investment in manufacturing sector. There were several benefits of this initiative envisaged in form of new employment opportunities, self sufficiency in respect of critical products, control over inflationary trends, etc. Concessional tax regime was introduced in the year 2019 for corporates. While the existing companies are eligible for ~25 per cent income-tax rate (section 115BAA), newly set up companies (after 30 September 2019) engaged in manufacturing are eligible for concessional tax rate of ~17 per cent (section 115BAB^[1]). There is also no Minimum Alternate Tax^[2] calculated as a percentage of book profits applicable on opting for either of these concessional tax rate regimes.

There are several conditions that need to be satisfied to be eligible for these concessional tax rates, as specified under sections 115BAA and section 115BAB of the Income-tax Act, 1961 (“Act”). Further, such conditions need to be satisfied on a continuing basis and if, the same are not satisfied in any particular year, then such concessional tax rate would cease to apply.

One of the critical conditions is that the manufacturing or production activity needs to commence before 1 April 2024. So, unless there is an extension by the government of the said timeline, there’s less than a year available to be ready with manufacturing set up. Further, even if such extension is intended, one may need to wait till Union Budget 2024 to see if it actually comes, which would be too late to plan for any set up activities after that.

In such a scenario, the entities planning new investment in manufacturing operations in India, can consider following aspects would, while eyeing for concessional tax rate of 17 per cent, in such a short timeframe:

Cost benefit analysis, in light of projections of new future business and profit from such business over a timeframe of 5 to 10 years and ~8 per cent of such profit being the tax benefit;
There are certain deductions and concessions to be foregone on opting for concessional tax rate, some of which may be relevant to consider before opting for concessional tax rate regime;
Internal business plans and necessary approvals, if the business projection portrays a positive future business scenario;
Analysis of eligibility for concessional tax rate in light of various conditions laid down in section 17 of the Act. More particularly, some of the important fact specific issues are covered below:
- If there is already an existing business operation in India, then it would need to be analysed whether the new proposed manufacturing business activity can be said to be not formed by splitting up or reconstruction of existing business activity – while this may be more relevant, when there is an existing manufacturing activity in India, at times, this may also turn out to be relevant, even in case of other existing business activities;
- The business activities of a new entity needs to be restricted to manufacture or production only (and some specified allied business activities). If there are any other business activities that are not specified; but need to be undertaken (such as, after sales services, etc.), then further cost benefit analysis needs to be undertaken for structuring these business activities differently;
- Similarly, the extent of processes proposed to be undertaken in India would need to be evaluated to assess, if the same amount to manufacture or production;
- If there is a plan to use old plant and machinery already used in past, then it needs to be ensured that such old and machinery does not constitute more than 20 per cent of total value of plant and machinery. Subject to certain conditions, machinery imported from outside India may also not be considered to be old plant and machinery for this condition.
Once it is identified that conditions for eligibility can be met, then identification of location, availability of any state incentives or subsidies, etc. can be checked;
This would be followed by company incorporation, infusion of funds, actual setting up of new plant and commencement of production/manufacturing activity, obtaining necessary registrations, permissions and approvals for the factory set up.

It can be seen that there’s significant action required before the manufacturing activity can be set up and commence. Hence, appropriate steps in this direction need to be taken in a timely manner, not to miss the opportunity of being eligible for concessional tax rate.

Conclusion

Given the multiplicity of action items, planning for any new investment in manufacturing activity needs to take into consideration above aspects on an immediate basis, to optimise the benefits from new set up. However, in order to simplify the process, one can also plan to start with manufacturing operations on a smaller scale to meet the timelines and keep on growing these operations over a period, as the business opportunities grow. Such scaled up operations after 31 March 2024 in the manufacturing entity, which is already eligible for concessional tax rate under section 115BAB, also become eligible for concessional tax rate. This would give a benefit to lock in concessional tax rate in perpetuity (unless the law changes) and at the same time, the profits from scaled up operations in future will also be eligible for concessional tax rate.

[1] Benefit extended to new cooperative societies set up after 31 March 2023.

[2] Generally, arises in case of inadequate tax profits due to any concessions, accelerated deductions or set off of brought forward losses.