Section 115BAB of Income Tax Act: Special Tax Rate for New Manufacturing Companies

What Is Section 115BAB of the Income Tax Act?

Imagine India wants more factories and workshops to pop up. So, the government said: if you start a fresh manufacturing company, we’ll slash your tax to just 15%. That’s Section 115BAB-a rule that gives a special, lower tax rate to new manufacturing companies, so they can grow faster. It’s all part of the Make in India plan to boost production.

Who Is Eligible Under Section 115BAB?

For a company to qualify:

• It must be a domestic company-formed and registered in India on or after October 1, 2019.
• It must start production by March 31, 2024 (this deadline was extended from March 2023).
• It should be brand-new-not made by splitting, merging, or reconstructing an older company.
• It must use new machinery (except imported used ones), or older machinery accounting for no more than 20% of total machinery.
• It cannot use a building that used to be a hotel or convention center.
• It must be only into manufacturing or closely related activities-not software, movies, mining, gas bottling, or other non-manufacturing businesses.

What Is the Tax Rate Under Section 115BAB?

• Base tax rate: 15% on total income.
• Surcharge: Flat 10%, regardless of income level.
• Health & Education Cess: 4%.
• This means the effective tax rate becomes around 17.16%, which is much lower than regular corporate rates (about 25-30%).

Conditions to Avail Benefits of Section 115BAB

The special tax rate comes with trade-offs:

• You cannot claim most deductions or incentives, such as:
  • Tax holidays for SEZ units (Section 10AA).
  • Additional depreciation or investment-linked allowances (Sections 32(1)(iia), 32AD, etc.).
  • Exemptions for scientific research, agro projects (Sections 33AB, 35AD, etc.).
  • Deductions under Chapter VI‑A (Sections like 80IA), except employment-related Section 80JJAA.
• You cannot set off losses or depreciation carried forward that relate to these disallowed deductions.
• MAT (Minimum Alternate Tax) does not apply to companies opting for Section 115BAB.

How to Opt for Section 115BAB?

• You must file Form 10‑ID-it’s your official choice to use this tax rate.
• You must submit it by the due date of your income tax return for the first eligible year (typically September 30 of the assessment year).
• Once chosen, this option is binding and cannot be withdrawn in future years.
• You must consistently meet the eligibility conditions each year; otherwise, Section 115BAB benefit may lapse.

Benefits of Section 115BAB for New Manufacturing Companies

• Lower tax burden-significantly more savings than under old tax rules.
• Encourages Make in India by making manufacturing more attractive.
• Helps boost foreign and domestic investment, job creation, and economic growth.
• Simplifies compliance-no complex deductions to claim or worry about.

Limitations and Challenges of Section 115BAB

• You lose valuable exemptions and incentives that could otherwise reduce tax.
• The scheme has narrow eligibility-many companies won’t qualify.
• You must rigorously comply-using disallowed deductions or missing deadlines disqualifies you.
• If your business grows to include other activities or uses old assets, you might lose this beneficial tax status.

Impact of Opting 115BAB on Business Strategy

Opting for 115BAB affects your choices-like forgoing R&D funding or industry-specific tax breaks-but gives clarity and stability on tax costs, which can be good when planning operations or investments.

Comparison with Other Corporate Tax Regimes

• Regular tax regime: ~25% base + surcharge + cess = ~28–30%.
• Section 115BAA (other companies): 22% base rate.
• Section 115BAB (manufacturing): lowest at 15% base-great if you qualify and don’t need other deductions.

Post-2023 Extension and Important Dates

Originally, companies had to start operations by March 31, 2023. This changed with the 2023 Budget, extending for companies that begin production by March 31, 2024.