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TMI BlogSpecial 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, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, 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 backd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 stri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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