While much has been said and talked about the recent fillip given by the Honourable Finance Minister to the corporates, especially new companies registered on or after 01.10.2019 and engaged in the business of manufacturing of articles or things on satisfaction of certain conditions, the devil, as always, ultimately lie in the details.
Section 115BAB of the Income-tax Act, 1961 ("the Act"), introduced earlier vide Taxation Laws (Amendment) Ordinance, 2019, found its way into the Act vide Taxation Laws (Amendment) Act, 2019 ["Amendment Act"]after the Parliament resumed for the winter session. While the Ordinance was lauded for providing simplicity in computation, supplemented by drastic reduction in tax rates for new companies satisfying the criteria laid down therein, the Amendment Act, not only added many layers of complexity to the computation of tax liability of such companies, but also has the effect of diluting the intent for which such concessional tax regime was introduced. Few of such changes are discussed as under:
a. Treatment of incidental or other income earned by manufacturing companies:
While it is quite normal for any person, including corporates, to parksurplus funds in any other income generating / capital appreciating streams of investments, including fixed deposits, the manufacturing companies, who have opted for concessional tax regime, are discouraged from parking such excess funds in such profitable streams, as the 1st proviso to section 115BAB(1) of the Act provides taxation of such income, which are neither derived from nor are incidental to manufacturing or production of article or thing and in respect of which no specific rate has been provided in Chapter XII, to be taxed at 22% on gross basis, i.e. without allowing any deduction of expenditure or allowance. While there is no specific reason attributed for providing such a differential rate, the underlying motive of having a single effective rate of 15% (excluding surcharge and cess) would not be achieved as, all manufacturing companies will have other incidental incomes like interest, rental income etc., like other companies and as a result, the effective rate of tax will always be more than 15% after taking into account the rate of tax on such other incomes. Further, such manufacturing companies are put in a more disadvantageous position as compared to companies who have opted for concessional tax regime under section 115BAA of the Act and those who have opted for taxation under normal provisions as, such incidental incomes are taxable on net basis in the above cases with the tax rate being the same / marginally higher. In other words, what was announced as a single rate of 15% on total income of the manufacturing companies has now been restricted to the ratebeing applicable on the income from manufacturing activity only and not on other incomes earned by such companies. Further problem arise in a scenario where such company carries on any other business activity like trading or providing any other service not relating to manufacturing and income arising from such activities are again taxable on gross basis, which again put such companies in a disadvantageous position as compared to other companies who have opted for taxation under section 115BAA or under other normal provisions.
It may also be stated that while every step is being taken by the Government to reduce litigation, the issue as to what income of such manufacturing companies are derived from and are incidental to manufacturing or production of article or thing would certainly be a subject matter of litigation. History supports the view as we have witnessed umpteen number of litigations on this issue under claims of deductions under sections 80HH, 80I, 80-IA, 10A, 10B etc.
A further clarity on the aforesaid issues in the upcoming Budget would bring certainty and would be a step forward in meeting the intent behind the new provisions.
b. Taxation of short term capital gain:
Third proviso to section 115BAB(1) also provides for taxation of short term capital gain in the case of sale of non-depreciable assets at the rate of 22%. While the rate is a concessional rate qua the normal rate of 30% applicable in the case of companies who have not opted for the concessional tax regimes introduced vide the Amendment Act, yet, it is unclear as to the applicability of the said provision on short term capital gain arising from sale of equity shares in a company or a unit of equity oriented fund where section 111A may also be applicable. A litigation may be unavoidable on which provision is specific and assessees may prefer to pay concessional tax at the rate of 15% under section 111A of the Act.
A further controversy which may arise in the case of sale of depreciable assets by such manufacturing companies where, section 50 of the Act may become applicable. In such a situation, the normal rate of 30% on such capital gains or 22% rate on gross basis under first proviso to section 115BAB(1) may apply, which again, is prone to litigation as to (a) which provision is specific; and (b) on applicability of first proviso in the case of capital gains. This puts the manufacturing companies opting for taxation under section 115BAB in a disadvantageous position compared to the ones who have opted for taxation under section 115BAA of the Act, as, under that section, short term capital gain would be subjected to tax at the rate of 22% on net basis only. Similar controversy may arise in the case of taxation of long-term capital gains as well.
c. Narrowing the scope of 'manufacture':
The Amendment Act also witnessed the introduction of Explanation to Section 115BAB(2) which excludes activities which, according to the Government, are not in the nature of manufacture. While the Explanation is targeted at nullifying the effects of the decisions of the Courts which held these activities to be in the nature of manufacture, [for eg., in ITO vs Arihant Tiles and Marbles Pvt Ltd: 320 ITR 79 (SC) where conversion of marble blocks into slabs by sawing the blocks was held to be manufacture and in CIT vs Hindustan Petroleum Corporation Ltd: 396 ITR 696 (SC) where bottling of gas into cylinder for domestic use was held to be manufacture], the Explanation has also vested the Board with powers to notify businesses, which according to it, are not manufacture. Excluding certain activities where the Apex Court has taken contrary views and amplifying the powers given to the Board to expand the list, only dampens the spirit of the investors to invest in manufacturing and brings uncertainty in mind of companies in anticipation of U turn by Government/Board in future.
Quoting the Hon'ble Finance Minister from the press conference dated 20.09.2019 when the scheme was announced, "In order to attract fresh investment in manufacturing and thereby provide a boost to make in India, another provision has been inserted to the Income-Tax Act with effect from fiscal year 2019-20, which allows any new domestic company incorporated on or after 01.10.2019, making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%",in order to achieve the purpose for which the concessional tax regime was introduced, the time is right for the Government in the forthcoming Budget, which is to be proposed within 2 months from the passing of the Amendment Act, to set things right and remove the bottlenecks and complexities to make one effective concessional rate applicable on the total income of manufacturing companies as against multiple rates for different sources of income under different situations and thereby restoring the promise made by the Hon'ble Finance Minister and the Revenue Secretary at the press conference.