• Naveen Aggarwal, Partner |
3 min read

India has been actively fostering the expansion of the manufacturing industry as a crucial catalyst for the economy and at par with global peers. In order to encourage domestic manufacturing, section 115BAB was introduced in the Income-tax Act, 1961 offering a favorable tax regime to greenfield manufacturing ventures. Under section 115BAB, newly established domestic manufacturing companies are subject to a reduced tax rate of only 15% on their total income. Considering the surcharge and cess, the effective tax rate amounts to 17.16%, which is significantly more attractive compared to the existing corporate tax rates (ranging from 25% to 30%). This benefit was available to domestic manufacturing companies registered on or after 01 October 2019 and which commenced manufacturing or production on or before 31 March 2023. Finance Act 2022 extended this sunset date to 31 March 2024.

For industry players rebounding from the pandemic afflicted slowdown, the one-year extension certainly seems insufficient. Further, clearly, the undeniable benefits of this incentive makes a case for extension of the sunset clause by another 3 years.

Section 115BAB aims at fostering import substitution by incentivizing domestic production, not only bolstering India's economic resilience but also building a self-sufficient and sustainable economic framework. Further, this policy has encouraged the establishment of new ventures, providing a significant boost to the country's workforce contributing to the overall socioeconomic development. It seamlessly aligns with the 'Make in India' campaign, fostering domestic production and establishing India as a prominent global manufacturing center. Additionally, the manufacturing drive has also attracted Start-ups and small businesses, to explore opportunities in the sector, which has encouraged innovation and expansion within the industry. Therefore, extending the sunset period is crucial to ensure the sustainability of this transformative ambition, besides reducing import dependence, strengthening India's economic autonomy, promoting entrepreneurship and supporting long-term job growth.

While the concessional tax rates have benefited the industrial and manufacturing sector, further embellishments can aid in cementing India’s position in the global manufacturing landscape. Currently, only the manufacture or production of any article or thing, along with research or distribution of such articles is eligible for the reduced rate. Certain activities, including software development, marble block conversion, gas bottling, book printing, and cinematograph film production, are not considered as qualifying businesses for the incentives. Expanding the concessional tax regime to include segments allied to manufacturing, such as simulation services and testing services can be looked at. This would particularly help smaller enterprises and the MSME sector.

The concessional tax regime is also strategic in terms of overall China plus one sentiment. Lower attractive tax rate is one of the strong pull factors against regimes like China, Malaysia, Vietnam, Thailand, and Taiwan. Which is why the manufacturing sector has welcomed its introduction, and why it is more important for the government to extend and broaden the scope of application.

The influence of Section 115BAB on India’s manufacturing ecosystem is unquestionable. With the changing global market dynamics, it is crucial to extend the duration of this provision to align with the government's objective of nurturing a strong, self-sufficient domestic manufacturing ecosystem as well as attract global firms that are increasingly looking at India as a viable partner in supply chain diversification.

A version of this article was published on Jan 28, 2024  by The Economic Times Online.