Section 115BAB: 15% Tax Rate for New Manufacturing Companies

What is Section 115BAB?

Section 115BAB, introduced via the 2019 Taxation Laws Amendment, provides domestic manufacturing companies a concessional tax rate of 15% (effective 17.16% with surcharge and cess). This is even lower than Section 115BAA's 22% rate, making it one of the most competitive corporate tax rates globally.

The objective: encourage 'Make in India' by making domestic manufacturing investment attractive.

Strict eligibility criteria

To qualify for 115BAB, the company must:

1. Be a NEW company — Incorporated on or after 1 October 2019
2. Commence manufacturing by 31 March 2024 (extended through subsequent FAs; check current deadline)
3. Be ENGAGED in manufacturing or production of any article or thing
4. Not be formed by splitting up of an existing business
5. Not use any plant or machinery previously used in India (some imported used machinery up to 20% of total is allowed)
6. Not use building previously used as hotel/convention centre
7. Not derive income from non-manufacturing activities (some incidental income okay)

Effective tax rate calculation

For 115BAB:

• Base tax: 15%
• Surcharge: 10% of tax
• Health & Education Cess: 4% of (tax + surcharge)
• Effective rate: 17.16%

Compare with:

• 115BAA (22% nominal, 25.17% effective)
• Normal regime small company (25% nominal, 27.82% effective)
• Normal regime large company (30% nominal, 34.94% effective)

Saving for manufacturing startups vs normal: 10-17% of profits — substantial.

Conditions to forgo

Like 115BAA, the company must forgo various exemptions:

• Section 10AA (SEZ)
• Section 32(1)(iia) additional depreciation
• Section 32AD, 33AB, 33ABA
• Section 35 super-deductions (R&D)
• Section 35AD specified business
• Section 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID
• Section 80JJAA can still be claimed (employment)
• MAT (Section 115JB) — Not applicable to 115BAB companies

Practical considerations

• Setup cost may be higher — Cannot use second-hand machinery, must invest in new plant (small exception for imported used 20%)
• Activity restriction — Must be genuine manufacturing. Trading or service income disqualifies. Specific activities like printing of books, software development, mining are EXCLUDED.
• Form 10-ID — File before due date of first ITR to opt in. Irrevocable choice.
• Strict scrutiny — Income Tax officer may scrutinise to ensure compliance with all conditions. Maintain proper records.

Comparison: When to choose 115BAB

Choose 115BAB if:

• You're starting a fresh manufacturing operation (D2C product, food processing, electronics, textile, etc.)
• Capital investment is mostly in new machinery
• Activity falls within manufacturing definition
• You don't qualify for area-based exemptions (or value 15% rate higher)

Choose 115BAA instead if:

• Service or trading business
• Mix of activities (not pure manufacturing)
• Acquired existing business with second-hand machinery
• Software development, IT services (not 'manufacturing' under 115BAB)