Special concessional tax regime for new manufacturing co-operative societies in India : Clause 204 of the Income Tax Bill, 2025 Vs. Section 115BAE of the Income Tax Act, 1961

Clause 204 Tax on income of certain new manufacturing co-operative societies.

Income Tax Bill, 2025

Introduction

Clause 204 of the Income Tax Bill, 2025, introduces a special concessional tax regime for new manufacturing co-operative societies in India. This provision is designed to incentivize the establishment and operation of manufacturing co-operatives by offering a reduced income tax rate, subject to stringent conditions and procedural requirements. The legislative intent aligns closely with the existing Section 115BAE of the Income Tax Act, 1961, which was recently inserted to provide a similar concessional regime. The practical implementation and procedural aspects are further detailed in Rule 21AHA of the Income-tax Rules, 1962.

The following commentary provides a comprehensive and structured analysis of Clause 204, examining its objectives, key components, and implications, and then undertakes a detailed comparative analysis with Section 115BAE and Rule 21AHA. The commentary concludes with practical observations and suggestions for future development.

Objective and Purpose

The primary objective of Clause 204 is to foster the growth of new manufacturing co-operative societies in India by granting them a favorable tax rate of 15% on manufacturing income. This measure is part of a broader policy initiative to encourage formalization, employment generation, and capital investment in the manufacturing sector, especially within the cooperative framework, which is often associated with rural development and inclusive growth.

The rationale for such a provision is two-fold:

• Competitiveness: By lowering the effective tax rate for new manufacturing co-operative societies, the government aims to make India's cooperative manufacturing sector more competitive globally.
• Targeted Incentivization: The provision is carefully tailored to ensure that only genuinely new manufacturing activities benefit, thereby avoiding misuse by existing entities through restructuring or mere re-registration.

The legislative history and policy backdrop of Clause 204 reflect a continuation and refinement of the approach adopted in Section 115BAE, with procedural and definitional clarifications to ensure effective implementation.

Detailed Analysis of Clause 204 of the Income Tax Bill, 2025

1. Scope and Applicability

Clause 204 applies to co-operative societies resident in India that are engaged in the business of manufacture or production of any article or thing. The provision is overriding in nature, subject to certain exceptions (notably, sections 203 and other parts specified).

Key Features:

• Optional Regime: The concessional tax rate is available at the option of the assessee, which must be exercised in a prescribed manner.
• Eligibility Window: The society must be set up and registered on or after 1st April 2023 and must commence manufacturing or production on or before 31st March 2024.

2. Tax Rates and Income Characterization

Clause 204 introduces a tiered tax rate structure, based on the nature of income:

• 15%: On total income (other than specified categories) derived from manufacturing or production activities.
• 22%: On income not derived from or incidental to manufacturing/production, and for which no specific rate is otherwise provided. No deduction or allowance is permitted in computing such income.
• 22%: On short-term capital gains from transfer of capital assets on which no depreciation is allowable.
• 30%: On income deemed so u/s 205(4) (presumably anti-avoidance or transfer pricing adjustments).

This structure is designed to restrict the benefit of the concessional rate strictly to manufacturing income, while taxing other income streams at higher rates to prevent misuse.

3. Conditions for Availing the Regime

The following conditions must be fulfilled for eligibility:

• The option must be exercised as per sub-section (2).
• The society must be set up and registered on or after 1 April 2023.
• Manufacturing or production must commence on or before 31 March 2024.
• Total income must be computed as per sub-section (3).
• All conditions in section 205(2) must be satisfied (likely relating to anti-abuse provisions, business formation, and use of new machinery).

The option, once exercised, is irrevocable and applies for all subsequent tax years. Any failure to comply with the conditions results in automatic withdrawal of the concessional regime for that and all future years, reverting to normal tax provisions.

4. Computation of Total Income

The total income eligible for the concessional rate must be computed:

• Without any deduction: Under Chapter VIII (except section 146) or sections specified in 205(1)(a)-(g) (likely various incentive provisions).
• Without set-off: Of any losses or depreciation carried forward from earlier years, if attributable to disallowed deductions.
• Deemed full effect: Any such loss or depreciation is deemed to have been given full effect, and no further deduction is allowed in subsequent years.

This ensures that the benefit of the lower tax rate is not compounded by other tax incentives or loss set-offs, aligning with the principle of a "clean slate" regime.

5. Exercise of Option and Procedural Aspects

The option must be exercised on or before the due date for filing the first return of income (as per section 263(1)). The process is to be prescribed, likely mirroring the electronic filing and verification procedures u/r 21AHA.

Once exercised, the option cannot be withdrawn. Failure to meet conditions results in invalidation of the option for the relevant and subsequent years, with normal tax provisions applying.

6. Anti-Avoidance and Compliance Mechanisms

The provision includes reference to fulfilment of conditions in section 205(2), which likely incorporates anti-abuse measures such as restrictions on business reconstruction, use of old machinery, and related-party transactions, similar to the framework u/s 115BAE and transfer pricing rules.

Practical Implications

For Co-operative Societies: The regime offers a significant reduction in tax liability for eligible new manufacturing co-operatives, providing a strong incentive for new entities to be established and operationalized within the stipulated window. However, the strict conditions and irrevocability of the option require careful planning and compliance.

For Tax Authorities: The regime's design, with its "all-or-nothing" approach, simplifies administration but also necessitates robust verification of eligibility, commencement of manufacturing, and ongoing compliance.

For Policy and Industry: The provision, if effectively implemented, could catalyze investment and job creation in the cooperative manufacturing sector, with potential spillover benefits for rural and semi-urban economies.

Comparative Analysis with Section 115BAE of the Income Tax Act, 1961

Section 115BAE, inserted by the Finance Act, 2023, is the precursor to Clause 204 and contains broadly similar provisions. However, a close comparison reveals both continuity and certain nuanced differences.

1. Applicability and Scope

• Section 115BAE: Applies to co-operative societies set up and registered on or after April 1, 2023, and commencing manufacturing/production on or before March 31, 2024.
• Clause 204: Mirrors the above, but also references compliance with conditions u/s 205(2), which may be more detailed or updated in the new Bill.

2. Tax Rates and Income Classification

• Section 115BAE: 15% for manufacturing income, 22% for other (non-manufacturing) income, 22% for certain short-term capital gains, and 30% for income deemed so under anti-abuse provisions.
• Clause 204: Follows the same structure, but the reference to income "deemed so u/s 205(4)" suggests possible changes or expansions in the anti-abuse mechanism.

3. Conditions and Exclusions

• Section 115BAE: Contains explicit anti-abuse provisions (e.g., business not formed by splitting up/reconstruction, restriction on use of old machinery, exclusive manufacturing activity, etc.).
• Clause 204: Refers to compliance with section 205(2), which is presumed to contain similar or enhanced anti-abuse conditions.

4. Computation of Income and Set-off of Losses

• Section 115BAE: Disallows deductions under specified sections and set-off of losses/depreciation attributable to such deductions. Deems such losses/depreciation as fully set off.
• Clause 204: Adopts the same approach, with possible updates in the cross-referenced provisions.

5. Option Exercise and Irrevocability

• Section 115BAE: Option to be exercised on or before due date for first return (section 139(1)), irrevocable once exercised.
• Clause 204: Option to be exercised as prescribed (section 263(1)), with similar irrevocability and invalidation upon breach of conditions.

6. Anti-abuse/Transfer Pricing Provisions

• Section 115BAE: Contains explicit provisions for adjustment of profits in case of close connection or specified domestic transactions.
• Clause 204: Refers to income deemed u/s 205(4), suggesting that the anti-abuse framework may have been relocated or restructured in the new Bill.

7. Procedural Aspects

• Section 115BAE: Option to be exercised in the prescribed manner (see Rule 21AHA).
• Clause 204: Option to be exercised as prescribed, with reference to section 263(1) for due date.

Overall, Clause 204 appears to be a logical legislative successor to Section 115BAE, with possible refinements in cross-references, procedural aspects, and anti-abuse mechanisms. The core structure and intent remain the same.

Comparative Analysis with Rule 21AHA of the Income-tax Rules, 1962

Rule 21AHA operationalizes the option mechanism u/s 115BAE by prescribing the form, manner, and procedural safeguards for exercising the concessional tax regime.

1. Form and Manner of Exercising Option

• Rule 21AHA: The option must be exercised in Form 10-IFA, filed electronically with digital signature or electronic verification code.
• Clause 204: While Clause 204 does not itself prescribe the form or manner, it references exercise of option "as prescribed," indicating that similar or updated rules will be notified under the new regime.

2. Procedural Safeguards

• Rule 21AHA: Empowers the Principal Director General of Income-tax (Systems) to specify procedures, data standards, and security protocols for submission and storage of Form 10-IFA.
• Clause 204: The Bill leaves these procedural details to be prescribed by rules, in line with the approach u/r 21AHA.

It is expected that corresponding rules (possibly an updated or renumbered version of Rule 21AHA) will be notified to give procedural effect to Clause 204.

3. Practical and Compliance Implications

• The electronic filing and verification process enhances transparency and facilitates monitoring by tax authorities.
• The irrevocability of the option, coupled with strict timelines, places a premium on timely and accurate compliance by eligible societies.
• The centralized responsibility for data management and security ensures the integrity of the regime and supports future policy evaluation.

4. Potential Challenges

• The requirement for electronic filing may pose challenges for smaller or rural co-operative societies with limited digital infrastructure, necessitating targeted outreach and capacity-building by the authorities.
• Any changes in the prescribed form or process must be promptly communicated and supported by updated guidance to avoid inadvertent non-compliance.

Ambiguities and Potential Issues

While the regime is designed to be beneficial, certain ambiguities and potential issues merit attention:

• Cross-Referencing: Clause 204's reliance on other sections (notably section 205(2)) for critical eligibility conditions may create interpretation issues if those sections are amended or are not as detailed as Section 115BAE's conditions.
• Definition of "Incidental" Income: Both Clause 204 and Section 115BAE refer to income "incidental" to manufacturing. The boundaries of what is "incidental" are not defined, which may result in disputes.
• Restriction on Other Businesses: The explicit bar on engaging in other businesses is clearer in Section 115BAE; Clause 204's approach may require recourse to section 205(2) for clarity.
• Procedural Rigidity: The irrevocability of the option, while preventing abuse, may be unduly harsh in cases where circumstances change after the option is exercised.
• Anti-Abuse Provisions: The absence of an explicit anti-abuse/transfer pricing provision in Clause 204 (unlike Section 115BAE(4)) could be a loophole unless covered by section 205(4).

Practical Implications for Stakeholders

For Co-operative Societies

• Potentially lower tax outgo, subject to compliance with strict eligibility and procedural requirements.
• Need for careful business structuring to avoid inadvertent violation of conditions (e.g., use of old plant/machinery, engagement in non-manufacturing activities).
• Requirement to weigh the benefits of the concessional regime against loss of deductions and flexibility.

For Tax Professionals and Advisors

• Need for detailed due diligence and ongoing compliance monitoring.
• Advisory role in assessing the suitability of the regime for each client, considering both current and future business plans.

For Tax Authorities

• Increased scrutiny of eligibility, computation, and compliance with the prescribed conditions.
• Potential for increased disputes over interpretation, especially regarding "incidental" income and business restrictions.

Conclusion

Clause 204 of the Income Tax Bill, 2025, represents a significant opportunity for new manufacturing co-operative societies to benefit from a concessional tax regime, subject to rigorous eligibility and compliance conditions. The provision is closely aligned with the existing Section 115BAE and is supported by detailed procedural rules under rule 21AHA. While the regime offers clear advantages for eligible entities, it also demands careful planning, robust compliance, and ongoing monitoring to ensure its objectives are realized without abuse or administrative complexity.

Key areas for future development include harmonization of procedural timelines, clarification of cross-referenced conditions, and enhanced support for digital compliance, especially for smaller co-operative societies. Judicial or administrative clarification may also be needed on the interpretation of certain eligibility conditions and the application of anti-abuse provisions.

Alternative Titles for the Commentary

1. Concessional Taxation for New Manufacturing Co-operative Societies: A Comparative Analysis of Clause 204, Section 115BAE, and Rule 21AHA
2. Incentivizing Manufacturing through Tax Policy: Dissecting Clause 204 and its Legislative Counterparts
3. Clause 204 of the Income Tax Bill, 2025: Legal and Procedural Implications for Co-operative Societies
4. From Section 115BAE to Clause 204: The Evolution of Special Tax Regimes for Manufacturing Co-operatives in India

 

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Full Text:

Clause 204 Tax on income of certain new manufacturing co-operative societies.

 

Dated: 2-5-2025