Tax on income of new manufacturing domestic companies.

201(1)

Irrespective of anything contained in this Act, but subject to the provisions of Parts A, B and this Part other than sections 199 and 200, the income-tax payable in respect of the total income of an assessee, being a domestic company, specified in column B of the Table below, shall, at the option of such assessee, be computed at the rates specified in column C, if the conditions contained in column D thereof are fulfilled.

---table---

201(2) The option under this section shall be exercised by the assessee in the

manner prescribed subject to the following conditions:––

• (a) it shall be exercised on or before the due date specified under section 263(1) for furnishing first of the returns of income for any tax year;
• (b) such option, once exercised, shall apply to subsequent tax years;
• (c) once the option has been exercised for any tax year, it shall not be subsequently withdrawn for the same or any other tax year; and
• (d) where the assessee fails to fulfil the conditions contained in sub-section (1)(Table: Sl. No. 1.D) in any tax year,–– (i) the option shall become invalid in respect of such tax year and subsequent tax years; and (ii) the other provisions of this Act shall apply, as if the option had not been exercised for that tax year and subsequent tax years.

201(3)

For the purposes of sub-section (1), the total income of the assessee shall be computed,—

• (a) without any deduction under— (i) sections 45(2)(c) and 47(1)(b); (ii) Chapter VIII other than sections 146 and 148; or (iii) section 205(1)(a) to (g);
• (b) without set off of any loss or allowance for unabsorbed depreciation deemed so under section 116(1), if such loss or depreciation is attributable to any of the deductions referred to in clause (a).

201(4)

While computing the income of the assessee, the loss and depreciation, or both, as specified in sub-section (3)(b) shall be deemed to have been given full effect to and no further deduction for such loss or depreciation, or both, shall be allowed for any subsequent year.

201(5)

In case of an amalgamation, option under this section shall remain valid in case of the amalgamated company only and if the conditions contained in sub-section (1) (Table: Sl. No. 1.D) are continued to be fulfilled by such company

Explanation

Section Summary:

This section introduces a special tax regime for new manufacturing domestic companies in India. It allows such companies to opt for a reduced tax rate on their total income, provided they meet specific conditions outlined in the law. The option to avail this benefit is irrevocable once exercised and applies to subsequent tax years unless the company fails to meet the conditions.

Key Changes:

1. Reduced Tax Rates for New Manufacturing Companies: The section introduces a new tax rate structure for qualifying domestic companies engaged in manufacturing, which is lower than the standard corporate tax rates.
2. Irrevocable Option: Once a company opts for this reduced tax rate, it cannot withdraw the option in subsequent years.
3. Conditions for Eligibility: The reduced tax rate is contingent on fulfilling specific conditions, such as commencing manufacturing operations within a specified timeframe and meeting other criteria listed in the table.
4. Treatment of Losses and Depreciation: The section restricts the carry-forward of losses and unabsorbed depreciation attributable to certain deductions if the company opts for this regime.

Practical Implications:

1. For New Manufacturing Companies: Companies that qualify can significantly reduce their tax liability by opting for this regime. However, they must carefully evaluate the long-term implications, as the option is irrevocable.
2. Compliance Burden: Companies must ensure they meet the conditions specified in the table to continue availing the benefit. Failure to do so will result in the loss of the reduced tax rate for that year and subsequent years.
3. Impact on Losses and Depreciation: Companies opting for this regime cannot carry forward certain losses or depreciation, which may affect their financial planning.

Critical Concepts:

1. Domestic Company: A company registered under the Companies Act of India.
2. Total Income: The income computed without certain deductions, as specified in the section.
3. Unabsorbed Depreciation: Depreciation that could not be fully set off against income in previous years and is carried forward.
4. Amalgamation: The merger of two or more companies, where the amalgamated company continues to enjoy the tax benefits if it meets the conditions.

Compliance Steps:

1. Exercise the Option: The company must formally opt for this regime by the due date for filing its first tax return.
2. Maintain Eligibility: Ensure all conditions specified in the table (e.g., manufacturing commencement date) are met continuously.
3. Documentation: Keep records to prove compliance with the conditions, as failure to do so will invalidate the option.
4. Compute Income Correctly: Calculate total income without the deductions specified in the section and ensure no carry-forward of restricted losses or depreciation.

Examples:

1. Scenario 1: A new manufacturing company, XYZ Ltd., commences operations in 2023 and opts for the reduced tax rate under this section. It meets all conditions and enjoys the lower tax rate for 2023 and subsequent years. However, in 2025, XYZ Ltd. fails to meet one of the conditions. As a result, the reduced tax rate is invalidated for 2025 and future years, and the standard tax rates apply.
2. Scenario 2: ABC Ltd., a qualifying manufacturing company, opts for this regime in 2023. It has unabsorbed depreciation from 2022 attributable to deductions under sections 45(2)(c) and 47(1)(b). Under this section, ABC Ltd. cannot carry forward this depreciation for future years, and it is deemed to have been fully utilized in 2023.

This section provides a significant tax incentive for new manufacturing companies but requires careful planning and compliance to fully benefit from it.