In line with make in India initiative, Government of India had made a path breaking reform by reducing the tax rate for newly set-up manufacturing company to an effective rate of 17.16% (including surcharge and cess).  While this was certainly a welcome proposition, there are certain nuances which require clarifications to ensure corporates opting for these provisions are not entangled in litigation. We have tried to cover those in this article and hopeful that Government should provide clarifications around the same in upcoming budget session.

One of the key conditions for entitlement to lower tax rate of 17.16% is that the company should not be engaged in any business other than the business of manufacture or production. At the same time the section also provides that where the income includes any income, which has neither been derived from nor is incidental to manufacturing or production of an article or thing and in respect of which no specific rate of tax has been provided separately, such income shall be taxed at the rate of 22%.

This particular condition has led to genuine challenges for the businesses because typically activities like installation, commissioning and after sales services are integral part of a manufacturing business and the bear reading of the above provisions indicate such activities may make company illegible from the beneficial tax rates. Further, it is also possible that the companies may have to accept certain service requests from customers out of business exigencies which involve additional activities outside their core manufacturing activities. 

In an ideal scenario, such activities should form a part of incidental activities which are required to carry on the manufacturing business and hence, concessional rates should also be applicable to income from such activities. However, due to way provision is currently worded, the businesses have doubt on eligibility of availing lower tax rate especially in below circumstances:

In order to remove such ambiguity, Government must consider providing explicit clarifications which cover the above points and should also consider providing relaxations in terms of overall percentage or threshold limits. This will boost the adoption of the concessional provision which would in turn lead to more manufacturing entities being set-up by entrepreneurs to avail concessional tax rates. 

Another key aspect that merits consideration is with respect to exercising of the option by the company.  The section provides that the option has to be exercised by the company on or before the due date of filing of the return of income for ‘for furnishing the first of the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years’.  Given the use of plural phrase ‘first of the returns’ can the company choose to exercise the option in Year 2 or 3 despite commencing manufacturing operations in year 1? 

These are some of the open questions, which Industry is struggling with and clarification on the same by Indian Government may reduce the future litigations on these beneficial provisions.

Also, one of the conditions for availing the concessional tax rate is that the new entity should be set-up on or after 1st October 2019 and manufacturing activities should have commenced on or before 31st March, 2023. While such restrictions on setting-up and commencing business before a prescribed date is quite common for similar concessional provisions, the situation is unique in this case. This is because this concessional provision for new manufacturing entities was introduced with effect from October 2019 which is just a few months before the global pandemic of Covid-19 emerged. As we all know, the said pandemic has affected the business entities all over the world. Manufacturing Sector in India, being largely driven by labour, has suffered a greater disruption on account of reduced labour availability during this period due to frequent lockdowns and restrictions on movement of people. Aside from the labour shortage, the pandemic also affected the businesses economically. In view of the same most businesses have kept the plans for fresh infusion of funds and expansion of business in abeyance till the situation improves.

Further, even when the businesses consider moving ahead with setting-up of manufacturing facilities, there are huge supply-chain issues which has made it difficult to import goods including capital goods required for setting-up manufacturing facilities and raw-materials required for carrying out the actual manufacturing. Thus, expecting new manufacturing entities being incorporated after October 2019 to continue with their business plans, complete setting-up of manufacturing facilities and commence actual production before March 2023 is a far-fetched idea as it would completely disregards the challenges being faced by the entrepreneurs in this pandemic situation. 

Considering the above-mentioned exceptional situation, the Government should extend the timelines for commencing the manufacturing activity from March 2023 to at least a year to make up for the time lost by the business entities due to ongoing Covid-19 pandemic. 

The above measures are important to reduce the uncertainties and build confidence of the investors to consider India as a preferred manufacturing destination. Thus, inclusion of the above-mentioned suggestions in the upcoming Budget session will surely boost growth of Indian manufacturing industry, which has recently lost momentum, by attracting new investors into the manufacturing space.