Budget 2022 should build confidence in new manufacturing firms

  • Articles
  • Jan 29,22
Government has reduced tax rate for newly set-up manufacturing company to an effective rate of 17.16%. However, there are certain nuances which require clarifications. Maulik Doshi highlights on budget expectations for new manufacturing companies availing concessional tax rates.
Budget 2022 should build confidence in new manufacturing firms

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:
  • Whether provisioning installation and commissioning services can be considered as incidental activity and eligible to tax rate of 15%?
  • Whether major repairing / modification can be considered as manufacturing?
  • Whether provisions of designing services which are essential from a manufacturing perspective would qualify as incidental to manufacturing?
  • Where the company happens to provide any designing or repairing services on account business exigencies, on exceptional basis, would amount to violation of condition (i.e. not engaged in any business other than manufacturing or production) and thus disentitle the company from concessional tax regime for life?

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? 
  • If the answer to Issue 1 non affirmative, can the option be exercised by the company in a later year after discontinuing / segregating such activities in a separate entity?
  • Where the company intends to undertake manufacturing of different articles / things within same entity, will it be required to commence manufacturing of all such articles / things prior to 31st Mar 2023? In such case, in which year should the company exercise the option? 

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.

About the author:
Maulik Doshi is the Senior Executive Director - Direct Tax and Transfer Pricing Services at Nexdigm

Related Stories

Other Industrial Products
India’s growing economy gets budget’s booster dose

India’s growing economy gets budget’s booster dose

The budget has laid down a blue print for achieving the objective of Atmanirbhar Bharat and sustainable development in the future. However, it will be important to look at the execution, on which th..

Read more
Machine Tools & Accessories
Budget 2022 - Govt's Rs 7.5 lakh cr capex to augment machine tools demand: V Anbu

Budget 2022 - Govt's Rs 7.5 lakh cr capex to augment machine tools demand: V Anbu

Budget 2022 is a booster shot for Indian manufacturing and ease of doing business, says V Anbu, Director General & CEO, IMTMA, who reflects on how the budget fares for the Indian machine tool indust..

Read more
Plastic, Packaging & Printing
Budget 2022 shows commitment to energy transition, climate action

Budget 2022 shows commitment to energy transition, climate action

Proper implementation of action plans and policies (announced in the budget 2022-23) will open doors for the localisation of many green technologies and create a new green technology market in India..

Read more

Related Products

Stainless Steel Buttweld Fitting


Bhawal Steel Agency offersa wide range of stainless steel buttweld fittings.

Read more

Request a Quote

Face Shield


The company Standard also includes wizards to automate designs, perform strength tests, and determine the environmental impact of components Read more

Request a Quote



Galvalume roofing sheet is a new addition in citadels product portfolio. These well designe Read more

Request a Quote

Hi There!

Now get regular updates from IPF Magazine on WhatsApp!

Click on link below, message us with a simple hi, and SAVE our number

You will have subscribed to our Industrial News on Whatsapp! Enjoy

+91 84228 74016

Reach out to us

Call us at +91 8108603000 or

Schedule a Call Back