Extension Of Lower Corporate Tax for New Manufacturing Units

Extension Of Lower Corporate Tax for New Manufacturing Units

Extension Of Lower Corporate Tax for New Manufacturing Units – An Urgent Need

 

Authored by Shyam Sharma, CFO – O2 Power

To promote Government of India’s (GOI) Atmanirbhar Bharat / Made in India mission, the Finance Ministry had introduced lower corporate tax rate of 15% (effective rate 17.16%), by introduction of Section 115BAB in Income Tax Act, for new manufacturing units incorporated on or after 1st October 2019 w.e.f FY 2019-20. Further, minimum alternate tax (MAT) would also not be made applicable to such companies.

The condition for claiming the lower tax is to set up a new manufacturing unit and that it should start manufacturing by 31st March 2023. Finance Act 2020, clarified that new electricity generating plants, including renewable energy plants, are also eligible to claim this lower tax rate.

A Much-Needed Impetus

This was a trail blazing reform comparable to the 1991 economic reforms. Corporates, hitherto looking to boost investment in new production lines, took this well-timed impetus as a platform to compete against the might of Chinese products and their market share, scale and pricing power.

The GOI, in the last two years, added further muscle to the Atmanirbhar Bharat pledge by introducing numerous production-linked incentive plans for various sectors including solar module manufacturing. Covid 19 – A Stumbling Block

COVID 19 and the ensuing lockdown and restrictions put a speed breaker, resulted in contraction of demand and production volumes. Organisations plunged into the survival mode — re-drawing their strategies to tide through the pandemic-triggered limitations and putting their expansion plans on the back burner.

However, the increased pace of vaccination and hope for a V-shape demand recovery seem to offer the quintessential light at the end of the dark tunnel. Corporates, hopeful of a steady rebound, are going back to the planning desks and are evaluating   the modalities of restarting the work on planned new production facilities.

Need of the Hour — Extension

Having lost out on precious time (more than fifteen months), the biggest uncertainty Boards are facing today, across organisations, on new capex plan is whether the lower corporate tax will be extended beyond March 2023. This has a very huge impact on future free cash flows of the plants and on the ability to compete with Chinese and Taiwanese manufacturers.

Industry’s immediate request from the GOI, therefore, is to provide an extension of lower corporate tax for atleast five more years at the earliest (given large gestation periods) to enable the company boards to take quick capex decisions. This will help decisively in achieving the Government’s objective to increase manufacturing in India and be self-reliant, provide jobs to millions, become a contract manufacturing hub, provide options to global companies to diversify geographical risk and reduce their reliance on China. Early clarity on reduced tax regime will go a long way and will in propelling India towards the desired $5 trillion economy targets set by the Government.

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