New provision for new manufacturing companies – lot of conditions will cause poor chances of availing benefit of lower rate of Income-tax by manufacturers in real sense.

[CA DEV KUMAR KOTHARI]

Incentives with so many conditions are not good:

We find that even petty incentives allowed under the Income-tax Act are with so many conditions that it is difficult to comply with and also involves litigation as and when scrutiny assessment takes place. This is because tax authorities generally try to deny deductions on technical grounds and by taking arbitrary approaches. We find litigation in case of most of incentives.

Incentives should be so designed that it is easy to avail with least of conditions. The drafting should be in simple words and language.

Here we can also refer to provisions relating to medical insurance , preventive medical check-up expenses and medical expenses vide Section 80D which are highly complex and creates many classes of possible claims and imposes so many restrictions that too for a small deduction for general public who is a small or medium taxpayer for whom it make a difference. For high net worth assesses such small deduction really is not important, but because law provides for such deduction even high net worth assesse also claim such deductions.

Provisions could be drafted in simple language:

We find that even in new provisions which could be drafted in very simple language with clarity there are complications and ambiguities. In a newly drafted provision, there should be clarity and there should not be need to insert Explanations and Provisos. However, Explanations and Provisos are inserted as a matter of routine.

 On first reading of the provisions author also find that some provisions are superfluous. This is because provision shall apply to a newly incorporated company (on or after 01.10.2019) and will not be entitled to claim certain deductions and incentives. Therefore, there will not be carry forward of such deductions and incentives. However, provisions provide for bar on such set off of loss arising from such deductions. Provisions which appear to be superfluous are marked green.

Gestation period for manufacturing projects:

In case of manufacturing facilities gestation period is usually long. Depending on size and nature of manufactory, gestation period can be very long. Even in case of small manufactory (in real sense) gestation period can be at least 2-3 years.

The new provision of S.115BAB puts condition that company should be incorporated/ registered / set up on or after 01.10.2019 and has commenced manufacturing on or before the 31st day of March, 2023. That is to say maximum gestation period allowed is of 42 months have been allowed if one starts steps on 01.10.2019.

These time limits are very difficult to be complied with in case of large manufacturing companies. Even for small manufacturing facility gestation period is required for financial arrangements, obtaining permissions , registrations and licenses selection and acquisition of land, construction of buildings, obtaining water, gas and / or electricity connections acquisition and installation of plant and machinery, selection and engagement of suitable manpower, purchasing of raw material, stores, starting test runs, and commercial production etc.

Only manufacturing, called as screwdriver technology that is assembly units can achieve such target of registration and commencement of manufacturing in a short period.

Profitability in manufacturing companies:

In case of manufacturing companies, profitability is also difficult to achieve, particularly when product is a part of competitive market. This is due to several commercial aspects about product acceptability, ability to market product at remunerative price in competitive market, lower capacity utilization causing non achievement of break-even point leading to losses etc.

New provisions:

S.115BAB is reproduced below with highlights added:

Tax on income of certain new domestic manufacturing companies.

115BAB. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAA, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of fifteen per cent. , if the conditions contained in sub-section (2) are satisfied.

(2) For the purposes of sub-section (1), the following conditions shall apply, namely: -

(a) the company has been set-up and registered on or after the 1st day of October, 2019, and has commenced manufacturing on or before the 31st day of March, 2023, and, -

(i) is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the person of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in the said section;

(ii) does not use any machinery or plant previously used for any purpose.

Explanation 1.-For the purposes of sub-clause (ii), any machinery or plant which was used outside India by any other person shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:-

(A) such machinery or plant was not, at any time previous to the date of the installation by the person, used in India;

(B) such machinery or plant is imported into India from any country outside India; and

(C) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the person.

Explanation 2.-Where in the case of a person, any machinery or plant or any part thereof previously used for any purpose is put to use by the company and the total value of such machinery or plant or part thereof does not exceed twenty per cent. of the total value of the machinery or plant used by the company, then, for the purposes of sub-clause (ii) of this clause, the condition specified therein shall be deemed to have been complied with;

(iii) does not use any building previously used as a hotel or a convention centre, as the case may be.

Explanation.-For the purposes of this sub-clause, the expressions "convention centre" and "hotel" shall have the meanings respectively assigned to them in clause (a) and clause (b) of sub-section (6) of section 80-ID;

(b) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and

(c) the total income of the company has been computed, -

(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading

"C.-Deductions in respect of certain incomes" other than the provisions of section 80JJAA;

(ii) without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i); and

(iii) by claiming the depreciation under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

(3) The loss referred to in sub-clause (ii) of clause (c) of sub-section (2) shall be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

(4) Where it appears to the Assessing Officer that, owing to the close connection between the company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the company more than the ordinary profits which might be expected to arise, the Assessing Officer shall, in computing the profits and gains of such company for the purposes of this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F.

(5) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under sub-section (1) of section 139 for furnishing the first of the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:

Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

Conclusions:

In view of author, new provisions are not practical and are not likely to be used by many who want to engage in real manufacturing activity. Provisions contain superfluous contents which can cause more confusions and doubts.

Every year changes are introduced in various provisions concerning manufacturing companies. In future normal provisions can be more liberal. Therefore, a condition that once option is exercised, it will compulsorily apply is also not conducive to opting new provision. Furthermore, in case of manufacturing companies, there is always scope of expansion and diversification (forward and backward) , modernisation, updating of technology, plant and machinery etc. which require more investments. More investment, generally means lower taxable income.

Therefore, author feels that it will only be advisable to opt for new provision in case of screwdriver technology based manufacturing,( which are in nature of assembly of completely knocked down components (CKD) and are more or less in nature of trading activity.

We can recall examples of many such companies who first imported components and assembled them and marketed products like TV, Freeze, CD players, washing machines, even motor cars. These companies when started own manufacturing of major parts and real manufacturing, suffered losses. Many such companies were closed down and went in liquidation. Some very successful companies (at the time of assembling business) are now facing difficult times and are facing proceedings for recovery of loans and other due.

Discussions to this article

[Ganeshan Kalyani]

Sir, there are lot of practical issues which are not covered in the law in clear sense. Then follows the circular to clarify the same. Thanks to the govt that frequent FAQs are published to clarify the doubts in GST. Thanks to internet world where professionals are available online in social media to answer the queries. Always carrying law book is not possible and in this scenario the smartphone, internet, online tax website are boon to the tax querist. With ease the problems are solved. However, in law lot of practical issues are not cleard. In fact it is not possible to include all the practical business scenarios and answer them. Like for e.g. in case of purchase of goods from an unregistered dealer the responsibility to generate eway is cast upon the registered buyer. But what is the way out to deliver the way bill by the buyer to that unregistered supplier who do not have internet and computer. This is not answered. However the expectation is to have answer to the practical issue which the business faces. This view of mine is on the basis of GST but the concern I hope applies to direct tax as well. Thanks.