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This is how manufacturers can grab 15% corporate tax benefit, according to experts

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This is how manufacturers can grab 15% corporate tax benefit, according to experts

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Finance Minister Nirmala Sitharaman on Friday announced a massive incentive for corporates when she proposed a corporate tax rate at 15 percent for new domestic manufacturing enterprises set up after October 01, 2019. This benefit is available to companies which do not avail any exemption/incentive and commence their production on or before 31st March, 2023.

Finance Minister Nirmala Sitharaman on Friday announced a massive incentive for corporates when she proposed a corporate tax rate at 15 percent for new domestic manufacturing enterprises set up after October 1, 2019. This benefit is available to companies which do not avail any exemption/incentive and commence their production on or before March 31, 2023. The effective tax rate for these companies will be 17.01 percent inclusive of surcharge and cess.
However, there remains a question as to which entities can really avail this benefit.
Rajiv Bajaj, Bajaj Auto MD, told CNBC-TV18, "We are about to sign up with Triumph. So it may well make sense for Bajaj to look at a new entity because these brands, especially for exporters, are very very profitable. Therefore the very low tax rate on new companies is also great news for us."
Will that work?
Speaking to CNBC-TV18, Hitesh Gajaria of KPMG India and Pranav Sayta of EY India clarified the issue.
Do subsidiaries qualify for 15% tax?
According to both Gajaria and Sayta, a wholly-owned subsidiary could be eligible. However, they point out that the subsidiary will need to be set up a brand new plant with brand new machinery, to enhance capacity, add new workers, without splitting up any existing operations in any way.
Hitesh Gajaria said, “If an auto manufacturer sets up a subsidiary company after October 1, 2019 ... sets up a brand new plant with brand new machinery, enhancing capacity without splitting up or reconstructing any of its existing operations in the parent company, then I do not see why the new subsidiary company cannot enjoy this new concessional tax regime of 17 percent,” he said. "So companies will have to put on their thinking hat and companies will have to plan their affairs."
According to Sayta, what the law seems to say is that the new undertaking, new unit or the manufacturing facility which is set up in the newly incorporated wholly-owned subsidiary of the parent company should not be formed by the splitting up of or reconstruction of a business already in existence. "So, if for example an auto company were to shut down its existing plant and move the manufacturing of the same cars to a new plant in a wholly-owned newly formed subsidiary, that would be violative of the requirements of one of the conditions of the new ordinance," he said.
Sayta said however if it is for expansion, meaning the auto company’s current plant continues to produce and sell those same cars as usual but the new wholly-owned subsidiary is meant to set up an all-new plant for the additional cars that it is, the growth that it is projecting in its demand, or for newer models either ways, it should be perfectly in order. "In fact, that is the whole point, that so long as the company is newly formed and it starts production or manufacture before March 2023, so long as it is not just swapping or substituting for another manufacturing facility or plant, it should be fine. If it is an expansion, if it is an additional production without sacrificing the existing production, I think that should be perfectly fine.”
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