While industry bodies have sought extension of the one-time tax relief to new units to be incorporated for another three years, the government might opt to keep the facility open for another year only, for the time being.
While the interim Budget on February 1 may steer clear of any major changes in the tax policy, it will likely extend the sunset clause for the concessional 15% corporate tax rate for new manufacturing units beyond March 2024, sources privy to the matter said.
While industry bodies have sought extension of the one-time tax relief to new units to be incorporated for another three years, the government might opt to keep the facility open for another year only, for the time being. This is because it is keen to encourage units to implement the investment decisions without any further delay, given that the government’s ability to pump-prime the economy with its own capital expenditure is limited.
As per the current rules, the concessional corporate tax rate, first introduced in 2019, and extended by one year in the last Budget, can be availed by firms setting up new manufacturing units provided they commence operations by March 31, 2024. However, the pandemic related disruptions and global slowdown hindered many potential investors from setting up new plants and making full use of the tax incentive.
Acknowledging the significant impact that this measure has had and can have on promoting economic goals and drawing in foreign investments, experts say that prolonging the sunset clause of this regime for at least an extra two years would surely encourage firms to set up more units, and give a fillip to the incipient investment cycle.
“A concessional corporate tax rate will encourage domestic and foreign companies to set up manufacturing units in India, as it eases the burden for the initial years when one is trying to set up the business and be price competitive,” said Pallavi Singh Marwah, Senior VP at Super Plastronics Private Ltd.
“This will also encourage companies to bring innovative and technical know-how into India which will lead to improved productivity and quality as well as promote the ‘Make in India’ initiative,” she said.
Rrecent data released by the commerce ministry showed that foreign direct investment (FDI) equity inflow in the manufacturing sector between 2014-22 has increased sharply by 57% as compared to the previous eight years 2006-14.
Rohinton Sidhwa, Partner, Deloitte India says that the big projects involving auto EVs, battery packs and semiconductors are yet to fructify. These have high gestation periods, and thus an extension would only help the industries to ramp-meaning production.
The provision was brought in 2019 as the world was recovering from pandemic induced supply chain disruptions and the realisation that diversity in supply chain was critical for multinationals. “The re-ordering since then has progressed well especially for mobile and telecom manufacturing in India,” Sindhwa said.
Raju Kumar, Tax Partner, EY India says that it may be undeniable that the lower tax rate (15%) offered by Section 115BAB of the Income Tax Act could have increased profitability for beneficiaries and potentially attracted new investments in manufacturing, leading to growth.
Moreover, experts also say that the criterias required to avail the 15% incentive need to be streamlined further, in order to attract more industries; and the surcharge of 10% and cess of 4% on the 15% tax should be removed.
Presently, the corporate tax rate of 15% (including surcharge and cess rates) makes the total payable tax around 17%. “I would in fact recommend that the surcharge and the cess be done away with so that there is a flat rate of 15%, which would make it easier for foreign multinationals to understand an absolute incentive,” said Marwah.
Also, the elongation of the sunset period is not anticipated to significantly impact corporate tax collections. The current growth in Corporate Income Tax (CIT) revenue from April-November FY24 exceeds 20%, surpassing the 16% growth recorded in the same period of FY19.
Source:financialexpress.com