Income Tax 2025

Appearance

Tax on income of certain manufacturing domestic companies ​

199(1) ​

Irrespective of anything contained in this Act, but subject to the provisions of Parts A, B and this Part other than sections 200 and 201, the income-tax payable in respect of the total income of a person, being a domestic company, for any tax year, shall, at the option of such person, be computed at the rate of 25% subject to the following conditions:––

  • (a) the company has been set-up and registered on or after the 1st March, 2016;
  • (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–– (A) sections 45(2)(c) and 47(1)(b); (B) Chapter VIII-C, other than the provisions of section 146; or (C) sections specified in section 205(1)(a) to (g); (ii) without set off of any loss carried forward from any earlier tax year, if such loss is attributable to any of the deductions referred to in sub-clause (i).

199(2) ​

The loss referred to in sub-section (1)(c)(ii) shall be deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

199(3) ​

The provisions of this section shall not apply unless an option is exercised by the person in the manner as prescribed on or before the due date specified under section 263(1) for furnishing the first of the returns of income which such person is required to furnish and such option once exercised, shall apply to subsequent tax years.

199(4) ​

Once the option under sub-section (3) has been exercised for any tax year, it cannot be subsequently withdrawn for the same or any other tax year, except where the person exercises option under section section 200.

Explanation

Section Summary: ​

Section 199 of the new income tax law introduces a reduced tax rate of 25% for certain domestic manufacturing companies. This provision is designed to incentivize new manufacturing businesses by offering a lower tax rate, provided they meet specific conditions. The section applies to companies set up and registered on or after March 1, 2016, and engaged exclusively in manufacturing, production, or related research and distribution activities.

Key Changes: ​

  1. Reduced Tax Rate: The tax rate for eligible domestic manufacturing companies is reduced to 25%, compared to the standard corporate tax rate.
  2. Eligibility Criteria: Companies must meet specific conditions, such as being set up after March 1, 2016, and exclusively engaged in manufacturing or production activities.
  3. Restrictions on Deductions and Losses: Companies opting for this reduced rate cannot claim certain deductions or carry forward losses attributable to those deductions.
  4. Irrevocable Option: Once a company opts for this reduced rate, it cannot withdraw the option in subsequent years, except under specific circumstances.

Practical Implications: ​

  • For New Manufacturing Companies: This section provides a significant tax benefit, making it more attractive to establish new manufacturing businesses in India.
  • For Existing Companies: Companies that do not meet the eligibility criteria (e.g., those engaged in non-manufacturing activities or set up before March 1, 2016) cannot avail of this reduced rate.
  • Compliance Burden: Companies must carefully evaluate whether the reduced tax rate is beneficial, considering the restrictions on deductions and loss carry-forwards.

Critical Concepts: ​

  • Domestic Company: A company registered under the Companies Act of India.
  • Manufacturing or Production: The company must be engaged in the production or manufacture of articles or things, including related research and distribution.
  • Loss Carry-Forward: Normally, businesses can carry forward losses to offset future profits, but under this section, losses attributable to certain deductions cannot be carried forward if the reduced tax rate is chosen.

Compliance Steps: ​

  1. Eligibility Check: Ensure the company meets all conditions, including the date of incorporation and the nature of business activities.
  2. Exercise Option: If eligible, the company must formally opt for the reduced tax rate by the due date for filing the first income tax return.
  3. Maintain Records: Keep detailed records of income, deductions, and losses to ensure compliance with the restrictions outlined in the section.
  4. File Returns: Submit income tax returns on time, adhering to the chosen tax rate and related conditions.

Examples: ​

  • Scenario 1: A company incorporated on April 1, 2018, manufactures electronic components and conducts research on improving its products. It opts for the 25% tax rate under Section 199. The company cannot claim certain deductions (e.g., under sections 45(2)(c) or 47(1)(b)) or carry forward losses related to those deductions.
  • Scenario 2: A company set up in 2015 manufactures textiles but also operates a retail chain. Since it is engaged in non-manufacturing activities and was incorporated before March 1, 2016, it is ineligible for the reduced tax rate under Section 199.

This section aims to boost the manufacturing sector by offering tax relief to new companies, but it requires careful consideration of the trade-offs involved, particularly regarding deductions and loss carry-forwards.