The Indian Government has introduced a favorable tax regime for new manufacturing companies in the recent budget. The benefit will be available to the manufacturing setup in India from the financial year 2019-20 (AY 2020-21) onwards. The move aims to promote the make in India initiative and foster job creation in the Indian Economy. This move is an attempt to capitalize on the ongoing trade war between the United States and China. It is an attempt to provide lucrative manufacturing facilities in India as compared to China. It is especially beneficial because the tax rate for manufacturing companies in China is slightly higher adding surcharges.
Benefit Of Reduction In Corporate Tax Rate
The benefit of a reduction in corporate tax rates is available to domestic companies. As per the Indian Income-tax laws, the domestic company includes a company formed and registered in India. It also includes such other companies which in respect of its income, liable to tax under the Income-tax Act, has made the prescribed arrangements for the declaration and payment within India, of the dividends payable out of such income.
Thus a domestic company intending to avail underlying benefits of the lower tax rates needs to fulfill the specified conditions. These conditions are:
Specific Conditions For Domestic Company To Claim Lower Tax Rates
- For claiming the available benefit, company should have been set up and registered on or after 1 October 2019. However, the manufacturing may commence latest by 31st March 2023. Such a company should:
- Not come into existence as a result of splitting up and reconstruction of an existing business. An anomaly to this condition is the case of a business re-establishment under the provisions of Indian tax laws.
- Not make use of any plant or machinery previously used for any purpose. This condition is relaxed in the situation wherein the company intends to use such plant and machinery which has been used outside India and is being used in India for the first time. Another exception to the stipulated condition is the situation wherein the company intends use old plant and machinery, the value of which does not exceed 20% of the total plant and machinery used by the company.
- Not use a building previously used as a hotel or a convention centre. As per the classification provided by the Central Government ‘Hotel’ means a hotel of two-star, three-star or four-star category. ‘Convention centre’ means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, as may be prescribed.
2. If a company engages in any business other than the manufacture or production of an article or thing and research in relation to or distribution of such article or thing manufactured or produced by it, the benefits of the new favourable tax rates will not be available to such company.
3. While calculating the income of the company, the benefit of tax exemptions and incentives available under the Indian tax laws shall not be allowed.
If you are planning for a manufacturing setup in India, you may get in touch with Maier+Vidorno.