Concessional Taxation for Manufacturing Domestic Companies : Clause 199 of Income Tax Bill, 2025 Vs. Section 115BA of Income-tax Act, 1961

Clause 199 Tax on income of certain manufacturing domestic companies.

Income Tax Bill, 2025

Introduction

Clause 199 of the Income Tax Bill, 2025 introduces a new tax regime for certain manufacturing domestic companies. This provision, rooted in a policy drive to incentivize domestic manufacturing, echoes and updates the earlier Section 115BA of the Income-tax Act, 1961, and is operationalized via procedural rules such as Rule 21AD of the Income-tax Rules, 1962. The following commentary provides an in-depth analysis of Clause 199, its objectives, operative mechanics, and its comparative positioning vis-`a-vis the existing statutory and procedural framework. The analysis also highlights the practical and legal implications for stakeholders, while identifying areas of continuity, change, and potential ambiguity.

Objective and Purpose

The legislative intent behind Clause 199 is to further the government's agenda of promoting domestic manufacturing by offering a concessional corporate tax rate, subject to strict eligibility criteria. This approach is grounded in the recognition that manufacturing is pivotal to economic growth, employment generation, and technological advancement. The provision is also designed to simplify tax compliance for qualifying companies, reduce litigation over deductions and incentives, and enhance India's competitiveness as a manufacturing hub.

Historically, Section 115BA was introduced by the Finance Act, 2016, as a special regime for new manufacturing companies, offering a lower tax rate in exchange for foregoing certain deductions and incentives. Clause 199 of the 2025 Bill seeks to update and streamline this framework, possibly in light of evolving economic realities, policy feedback, and administrative experience.

Detailed Analysis of Clause 199 of the Income Tax Bill, 2025

1. Operative Scope and Applicability

Clause 199(1) establishes an overriding provision, stating that "irrespective of anything contained in this Act," but subject to certain parts and exceptions, the concessional tax regime is available. This ensures primacy over conflicting provisions, except for carve-outs (Parts A, B, and certain sections).

The concessional tax rate is set at 25% on the total income of a domestic company, for any tax year, "at the option of such person," provided the following conditions are met:

• Incorporation Date: The company must be set up and registered on or after March 1, 2016.
• Exclusive Manufacturing Activity: The company must not be engaged in any business other than manufacturing or production of articles or things, and related research or distribution of such manufactured or produced items.
• Computation of Total Income:
  • No Deduction: The total income must be computed without any deduction under:
    • Sections 45(2)(c) and 47(1)(b)
    • Chapter VIII-C, except section 146
    • Sections specified in section 205(1)(a) to (g)
  • No Set-off of Certain Losses: No set-off of any loss carried forward from earlier years if such loss is attributable to any of the above deductions.

2. Losses and Set-off (Clause 199(2))

Clause 199(2) stipulates that losses attributable to the prohibited deductions, and carried forward from earlier years, are deemed to have been given full effect to, and no further deduction for such loss is allowed in any subsequent year. This is a legislative deeming fiction to prevent double benefit from losses linked to disallowed deductions.

3. Exercise and Irrevocability of Option (Clause 199(3) and (4))

The concessional regime is not automatic; it requires the company to exercise an option in the prescribed manner, on or before the due date specified u/s 263(1) for the first return of income. Once exercised, the option is binding for all subsequent tax years and cannot be withdrawn, except when switching to another regime u/s 200.

This ensures certainty and prevents regime shopping while allowing for a one-time switch to another concessional regime if so provided u/s 200.

Comparative Analysis with Section 115BA and Rule 21AD

1. Section 115BA: Structure and Key Provisions

Section 115BA of the Income-tax Act, 1961, introduced a similar concessional regime for new manufacturing domestic companies. The salient features are:

• Applicability: Domestic companies set up and registered on or after March 1, 2016.
• Exclusive Manufacturing Activity: No engagement in non-manufacturing business.
• Computation of Income:
  • No deduction under a detailed list of sections (e.g., 10AA, 32(1)(iia), 32AC, 32AD, 33AB, 33ABA, 35/35AC/35AD/35CCC/35CCD, Chapter VI-A except 80JJAA).
  • No set-off of losses attributable to these deductions.
  • Depreciation u/s 32 (excluding 32(1)(iia)) as prescribed.
• Exercise of Option: To be made in the prescribed manner (see Rule 21AD), on or before the due date for the first return (section 139(1)).
• Irrevocability: Once exercised, the option cannot be withdrawn, except when switching to section 115BAA.

2. Rule 21AD: Procedural Mechanism

Rule 21AD operationalizes the exercise of option u/s 115BA(4). The rule prescribes:

• Option to be exercised in Form No. 10-IB.
• Filing to be done electronically, with digital signature or electronic verification code.
• Principal DGIT(Systems) to specify the procedure, data standards, and security policies.

3. Comparative Table: Clause 199 vs Section 115BA and Rule 21AD

Feature	Clause 199 of the Income Tax Bill, 2025	Section 115BA of the Income-tax Act, 1961	Rule 21AD of the Income-tax Rules, 1962
Applicability	Domestic companies set up on/after 1 Mar 2016	Domestic companies set up on/after 1 Mar 2016	Applies to exercise of option under 115BA(4)
Business Restriction	Manufacturing, research, distribution only	Manufacturing, research, distribution only	Not directly addressed
Tax Rate	25%	25%	Not directly addressed
Deduction Restrictions	No deduction under 45(2)(c), 47(1)(b), Ch. VIII-C (except 146), 205(1)(a)-(g)	No deduction under specified sections [10AA, 32(1)(iia), 32AC, 32AD, 33AB, 33ABA, 35, 35AC, 35AD, 35CCC, 35CCD, Ch VI-A except 80JJAA]	Not directly addressed
Loss Set-off	No set-off of loss attributable to above deductions	No set-off of loss attributable to above deductions	Not directly addressed
Depreciation	Not specifically stated	Depreciation u/s 32 (excluding 32(1)(iia)) as prescribed	Not directly addressed
Exercise of Option	Prescribed manner, by due date u/s 263(1)	Prescribed manner, by due date u/s 139(1)	Form No. 10-IB, electronic filing
Irrevocability	Once exercised, cannot withdraw (except u/s 200)	Once exercised, cannot withdraw (except u/s 115BAA)	Not directly addressed

Interpretation and Key Differences

1. Deduction Restrictions: Scope and Specificity

Clause 199 notably revises the list of disallowed deductions. While Section 115BA provides a detailed and explicit list of sections (many of which relate to accelerated depreciation, investment-linked deductions, and sectoral incentives), Clause 199 refers to a different set of sections-primarily 45(2)(c), 47(1)(b), Chapter VIII-C (except 146), and sections specified in 205(1)(a)-(g).

This shift may reflect a legislative intent to streamline or update the list of disallowed deductions, or to align with a new structure of the Income Tax Bill, 2025. However, the lack of direct correspondence between the two lists may create interpretational challenges, especially if the new regime omits or reclassifies certain incentives previously covered u/s 115BA.

2. Procedural Requirements: Option Exercise

Both Clause 199 and Section 115BA require the company to exercise the option in a prescribed manner, by the due date for the first return. However, Clause 199 refers to the due date u/s 263(1), while Section 115BA refers to section 139(1). This change may be due to renumbering or restructuring of procedural provisions in the 2025 Bill, but it is critical for companies to ensure compliance with the correct statutory reference.

Rule 21AD, while not directly referenced in Clause 199, is likely to be mirrored by a similar procedural rule under the 2025 framework, requiring electronic filing and verification of the option.

3. Irrevocability and Switching

Both provisions make the exercise of the option irrevocable, except in case of a switch to another concessional regime (section 200 in the Bill, section 115BAA in the Act). This is designed to prevent abuse and ensure stability in tax planning, but the specific cross-references must be carefully tracked to avoid procedural lapses.

4. Treatment of Losses

Both regimes create a legal fiction by deeming losses attributable to disallowed deductions as having been fully set off, precluding further carry-forward or set-off in subsequent years. This tightens the regime and prevents companies from claiming legacy tax benefits while opting for the new regime.

5. Depreciation

Section 115BA specifically provides for depreciation to be allowed u/s 32 (other than 32(1)(iia)), in the prescribed manner. Clause 199 is silent on depreciation, possibly because the new Bill restructures or consolidates depreciation provisions elsewhere, or because the intention is to allow normal depreciation without additional incentives.

Practical Implications

1. For Manufacturing Companies

The new regime continues to offer a concessional tax rate for new manufacturing companies, but with strict eligibility and compliance requirements. Companies must carefully evaluate whether they meet the exclusive manufacturing criterion, and must forgo a range of deductions and incentives. The regime is most attractive for companies that do not intend to avail of sectoral or investment-linked deductions, or who value certainty and simplicity in tax computation.

2. Compliance and Procedural Aspects

The requirement to exercise the option electronically, within the prescribed time frame, and in the prescribed form (likely to be similar to Form 10-IB u/r 21AD), places a premium on timely and accurate compliance. Failure to exercise the option correctly may result in loss of eligibility for the concessional regime.

3. Transition and Legacy Issues

Companies that have historically availed of deductions now prohibited under Clause 199 must recognize that any losses attributable to such deductions will be deemed to have been fully set off. This may affect deferred tax asset computations and financial planning.

4. Administrative and Regulatory Considerations

Tax authorities must ensure that the new regime is administered consistently, and that the transition from the existing Section 115BA regime is managed smoothly. Guidance may be needed on the interpretation of the new lists of disallowed deductions, and on procedural aspects of option exercise and withdrawal.

Ambiguities and Potential Issues

1. Coverage of Deductions

The shift in the list of disallowed deductions from Section 115BA to Clause 199 may create uncertainty for companies and tax advisors. If the new Bill reclassifies or omits certain incentives, companies may need clarification on whether those incentives are still available under the concessional regime.

2. Reference to Procedural Sections

The change from section 139(1) to section 263(1) for the due date of exercising the option may be purely structural, but could cause confusion unless the new Bill clearly maps these sections for practitioners.

3. Depreciation Treatment

The absence of a specific reference to depreciation in Clause 199, compared to the detailed provision in Section 115BA, may lead to divergent interpretations unless clarified by rules or circulars.

Unique Features and Policy Rationale

The new regime's focus on exclusive manufacturing activity, and its insistence on the irrevocability of the option, reflect a policy to target genuine new manufacturing investment, while preventing misuse by companies seeking to arbitrage between different regimes. The requirement to forgo a range of deductions underscores the government's shift towards lower rates with a broader base, rather than high rates with multiple carve-outs.

The procedural rigor, including electronic filing and verification, is consistent with the government's push towards digital tax administration and enhanced compliance monitoring.

Conclusion

Clause 199 of the Income Tax Bill, 2025, represents a continuation and refinement of the policy to incentivize new domestic manufacturing through a concessional tax regime. While it retains the core features of Section 115BA, it updates the list of disallowed deductions, modifies procedural references, and maintains a strict eligibility and irrevocability framework. Companies considering this regime must carefully weigh the trade-offs between a lower tax rate and the loss of certain deductions, and must ensure strict compliance with procedural requirements. The transition from the existing regime, and the interpretation of new or revised provisions, may require further administrative guidance to ensure clarity and consistency.

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Full Text:

Clause 199 Tax on income of certain manufacturing domestic companies.

 

Dated: 1-5-2025