– By Sneha P Pai
Since the Union Budget 2024-25 is an interim budget, it’s unlikely that many changes or reforms shall be introduced. However, India is at an important juncture and is hoping to attract investment in the manufacturing sector, including the manufacturing of electric vehicles, hydrogen fuel, heavy industry, etc. The government is likely to focus on the ‘Make in India’ program and the Aatmanirbhar Bharat initiative as these significant projects were introduced to keep India an attractive investment destination. To further boost manufacturing investments, we can expect a few changes in the related tax provisions.
1. Lower tax rate for manufacturing industries – Section 115BAB of the Income-tax Act 1961 (ITA)
As per Section 115BAB of the ITA, a new company engaged in the manufacturing sector can opt for a lower tax rate of 15% if certain conditions are fulfilled. This Section was a very welcoming step as it brings the tax rate in India at par with or even lower than the tax rates in many Asian countries. This rate cut has attracted quite a few manufacturing investments in India.
However, the benefit of this lower tax rate is available only if the company commences manufacturing by 31 March 2024. Thus, the sunset clause is only a couple of months away. It is hoped that the sunset clause would be extended by at least a year, ensuring that the current optimistic sentiment is retained and that investment in the manufacturing sector continues to increase.
2. Lower interest rate for certain External Commercial borrowings (ECBs)
At present, India is one of the fastest-growing economies in the world and it is the need of the hour to attract low-cost external funds to grow the economy. As per section 194LC of the ITA, the interest paid on ECBs was taxed at the rate of 5%, subject to the fulfillment of conditions. However, this lower tax rate could be availed only on ECBs borrowed before 1 July 2023. In order to boost the economy and attract low-cost investments, it is hoped to reboot the provisions of Section 194LC.
3. Capital investment-related incentives
The manufacturing sector is capital intensive. A few years back, the government introduced an investment allowance of 15% of the cost of plant and machinery capitalized in the books. This allowance was over and above the depreciation on the plant and machinery. Furthermore, investment in capital assets for in-house research and development for manufacturing was eligible for a weighted deduction. These incentives have been phased out.
It is hoped that asset-linked incentives will be revived to reduce the effective tax cost. Such incentives also contribute in making India a favored manufacturing destination and will be especially important if the lower tax rate of 15% is phased out.
4. Liberalized provisions for employee-based deductions
One of the focus areas of the government is also to create employment amongst the youth population. The manufacturing sector employs both skilled as well as unskilled labor. Currently, the companies are allowed an additional deduction of 30% of the employee cost incurred for new employees employed during the year for a period of three years, subject to fulfillment of certain conditions.
This deduction is available if the salary payout is up to INR 25,000 per month per employee. Given the upsurge in salary costs, such a limit of INR 25,000 per month is relatively low, resulting in very few industries being able to claim the deduction. It is hoped that this salary limit of INR 25,000 be increased.
(Sneha P Pai is the Senior Director, Direct Tax, at Nexdigm.)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)