Applicability of Section 115BAB?

Section 115BAB of Income Tax Act is applicable to all domestic companies other than companies that opted concessional rate of tax under section 115BA or 115BAA from the Financial Year 2019-20 (AY 2020-21) onwards subject to compliance of certain conditions.

Conditions to be complied with?

The company has been set up and registered on or after 1^st October 2019 and has commenced manufacturing or production of an article or thing on or before 31 March 2023, and:

The business is not formed by the splitting up or reconstruction of a business already in existence except in case of a business re-established under section 33B (Rehabilitation allowance).
Does not use any plant or machinery previously used for any purpose. However, the company can use plants and machinery used outside India and used in India for the first time. Also, the company can use old plants and machinery, the value of which does not exceed 20% of the total value of the plant and machinery used by the company.
Does not use a building previously used as a hotel or a convention centre. ‘Hotel’ means a hotel of two-star, three-star or four-star category as classified by the Central Government. ‘Convention centre’ means a building of a prescribed area consisting of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, as may be prescribed.

The company should be engaged in the business of manufacture or production of any article or thing, and research in relation to such article or thing. The company can also be engaged in the distribution of such articles or things manufactured or produced by it.

For the purpose of this section, the business of manufacture or production of any article or thing shall include the business of generation of electricity.

And the business of manufacture or production of any article or thing shall not include business of

Development of Computer software.
Mining
Bottling of gas into cylinders
Printing of books
Production of cinematograph films.
Any other business may be notified by the central government on this behalf.

The total income of the company should be calculated without claiming tax exemptions and incentives:

Definition of Manufacturing under Income Tax Act?

As per section 2(29BA) “manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing, —

(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;

Rate of Tax applicable?

Whether Set off and brought forward losses is allowed?

A new manufacturing company opting under this section cannot set off losses carried forward from earlier years, if such losses were incurred in respect of aforementioned deductions/incentives.

What is the Time limit for exercising the option?

Domestic Companies will have to exercise the option to be taxed under section 115BAB on or before the due date for filing of income tax return. For the FY 19-20 due date for filing of Income tax return covered under tax audit is 31^st Oct which has been extended to 30^th November by the finance ministry due to COVID 19.

Can a company opt out of section 115BAB?

No, Once the new manufacturing companies opt for section 115BAB in a particular financial year, it cannot be withdrawn subsequently.

Whether MAT is applicable in case of companies opt for section 115BAB?

No, Companies opt for section 115BAB will not be required to pay Minimum Alternate Tax (MAT) under section 115JB.

Whether a company is required to file any form for exercising the option?

Companies wishing to opt for section 115BAA shall exercise the option in form 10 ID for any previous year relevant to the assessment year beginning on or after 01^st April, 2020.

What is the tax rate for income not derived out of manufacturing activities?

Companies opting under this section 115BAB, shall be required to pay tax at the rate of 22% on the income which has not derived or incidental to manufacturing or production of article or thing and no deduction or allowance shall be allowed on such income.

What is the tax rate for short term capital gains?

Companies opting under this section 115BAB, shall be required to pay tax at the rate of 22% in respect of income being short term capital gains derived from transfer of capital asset on which no depreciation is allowable under the Act.