Updated : December 13, 2023Make in India, Save Big : The 15% Tax Advantage for Manufacturing Companies
Overview : The Indian government has made "Make in India" its primary focus to encourage more investments in the manufacturing sector. The corporate income tax rate for manufacturing companies has been reduced to a mere 15% to attract more investments. This blog provides insights on eligibility and advantages to help you claim your success. Learn more about India's Tax on Manufacturing Sector.
#IndiaTax #Manufacturing.
India’s “Make in India” campaign has garnered global attention due to its ambitious nature. One of the most attractive features of this campaign for manufacturers is the reduced corporate income tax rate of 15%. This competitive edge can significantly enhance your bottom line and make India an appealing location for establishing or expanding your manufacturing operations. The reduced corporate income tax rate is available for companies engaged in manufacturing activities and incorporated before March 31, 2024. The benefit of reduced corporate tax is also available for subsidiaries of foreign companies.
Here's why the 15% tax rate is a game - changer
- Reduced cost burden : Compared to the standard 22% corporate tax rate for newly incorporated companies, the 15% corporate tax rate offered to manufacturing companies can result in significant savings. These savings can be reinvested in your business, used for research and development, or improved profitability.
- Increased competitiveness : A lower tax rate can make the products of Indian manufacturers (Made in India) more competitive globally, allowing you to offer better prices to customers without compromising quality or margins.
- Attracting investors : The tax benefit enhances India's investment attractiveness for domestic and foreign investors, leading to increased capital inflows and accelerated business growth.
Let's Understand the Corporate Tax Rate
The Corporate Income Tax is a direct tax levied on the profits earned by companies in India. The tax rate is different for domestic companies, foreign companies, and companies with turnover below a certain threshold. Domestic companies are taxed at a lower rate than foreign companies. The Corporate Income Tax is an essential source of revenue for the Indian government, and it is used to fund various development projects and social welfare programs.
| Company Type | Tax Rate | Notes |
|---|---|---|
| Manufacturing Companies (Domestic) | 15% | Applies to new companies incorporated on or before March 31, 2024. |
| Other Domestic Companies | 22% | Standard corporate tax rate. |
| Partnership Firms (including LLP) | 30% | |
| Units of International Financial Services Centre (earning in foreign currency) | 9% | |
| Foreign Companies, including their Branch, Liaison or Project Office | 40% |
Cess & Surcharge : Upon the income tax calculated above, a Health and Education Cess of 4% shall be applied to all companies. Additional surcharges will apply at the following rates if the turnover exceeds a certain limit. However, for Assessment Year 2023-24, the maximum surcharge rate on dividend income or capital gain is 15%
- 10% of income tax for income exceeding Rs. 50 lakh.
- 15% of income tax for income exceeding Rs. 1 crore.
- 10% flat rate if opting for taxability under Section 115BAA/115BAB
Eligibility criteria to qualify for the 15% Corporate Tax Rate
- Company Type : It must be a domestic company engaged in the manufacturing or production of any article or thing in India. This includes research and development related to the manufactured product and its distribution.
- Incorporation Date : The company must be incorporated on or before March 31, 2024. Existing companies are also eligible for this benefit if they meet the other criteria.
- Turnover Requirement : There is no minimum turnover requirement for claiming the 15% tax rate. However, the company must have revenue generated from manufacturing activities in India.
What is a "Manufacturing Company" in this context ?
A “manufacturing company” refers to any company actively involved in physically transforming raw materials or existing products into finished goods. Essentially, any company that actively creates new products or significantly modifies existing products through physical processes can be considered a “manufacturing company” for availing of the 15% tax benefit.
When a company engages in multiple activities like manufacturing, trading, and providing services, applying the 15% tax rate becomes complex and requires a deeper analysis. Here’s the breakdown:
- Apportionment of Income : The company must apportion its income between these activities. This means determining how much revenue comes from manufacturing, trading, and services separately. Accepted methods for apportionment include :
- Direct allocation involves assigning income to each activity based on transparent and traceable factors, like dedicated resources or revenue streams.
- Proportionate allocation: This involves dividing the total income based on a reasonable and consistent proportion, like staff time or turnover attributed to each activity.
- Tax Rate Application : The 15% tax rate only applies to the income generated from manufacturing activities. Therefore, the revenue from trading and services will be taxed at the standard corporate tax rate of 22%.
- Separate accounting records : each activity is crucial for accurate apportionment and applying the correct tax rates.
Next steps
Please consult with our tax advisor to understand the specific eligibility criteria and implications of the 15% tax rate for your business. If your business structure is not a company, you should incorporate a company in India. If you are a foreign investor or company, it might be preferable to set up a wholly-owned subsidiary company in India or a joint venture with an Indian partner. We are here to assist you with any questions or concerns.
Conclusion
If a company is engaged in manufacturing or multiple activities, including manufacturing activities, it can claim a 15% tax rate. However, this requires careful analysis and apportionment of income. We highly recommend consulting with a tax advisor to ensure accurate application of the rules and compliance with all regulations. We can assist you in navigating the complexities and maximising the benefits of this tax incentive.
