Union Budget 2024 expected to focus on India’s manufacturing boom through tax incentives

To set the context, section 115BAB of the Income Tax Act, 1961 (the Act) provides a tax rate of 15% (plus surcharge and health and education cess) on the total income of a domestic manufacturing company, subject to satisfaction of certain specified conditions. One of the pre-requisites to avail the beneficial rate of 15% inter-alia, is that the company should have been incorporated on or after October 1, 2019 and it should already have commenced manufacturing or production on or before March 31, 2024.

Section 115BAB aims at incentivising domestic production which not only aids in augmenting India's economic resilience but also in building a self-reliant and sustainable economic framework. This has encouraged the establishment of new ventures, providing a significant uplift to the country's workforce and consequently, socioeconomic development. It aligns with the 'Make in India' campaign to establish India as a leading global manufacturing center and has helped in attracting start-ups to explore opportunities in the formalized sector. This has further bolstered innovation and expansion within the industry.

In addition to the above, the concessional tax regime is also strategically poised vis-a-vis the overall China plus one sentiment. In the past, lower tax rates have helped pull in more investors in countries such as China, Malaysia, Vietnam, Thailand, and Taiwan. This is why the manufacturing sector has welcomed the concessional tax regime introduction, and why its extension is a strong ask.

Given the positive influence of the regime on India’s manufacturing ecosystem, it is expected to be extended to more avenues, including software development, marble block conversion, gas bottling, book printing, and cinematograph film productions, etc. Expanding the concessional tax regime to include segments allied to manufacturing, such as simulation services and testing services, can also be explored to encourage new investments. Apart from these, the government may also consider offering the benefit to limited liability partnerships. Such measures would particularly help smaller enterprises and the MSME sector.

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To supplement the above, the government could also consider expanding the ambit of employment generation incentive. Currently, enhanced deduction is available in respect of new employees with salaries of less than Rs 25,000 per month. It is recommended to increase the salary limit in line with inflation, to widen the scope of deduction that can be claimed under section 80JJAA of the Act. This is likely to reduce taxes for the enterprise, which may be a minimal cost to the exchequer as additional employment could result in incremental individual income-tax collections. Also, the time period for claiming deduction may be increased from 3 years to 5 years. This will ensure that the newly incorporated companies are able to avail the benefit of this provision. It may be noted that companies may incur losses in the initial years of operations and hence, may not be able to claim the full benefit of this deduction.

While the existing provisions bar the claim of any other incentive / special deductions to enterprises availing the concessional tax regime, some of the conditions may be further relaxed to widen the ambit of the regime. One example could be allowing weighted deduction for expenditure incurred towards research & development (R&D) and / or including enterprises engaged in R&D within the ambit of section 115BAB.

The previous budgets have primarily focused on simplifying the tax structures and rationalising the existing provisions. However, the need of the hour now is to elevate India’s viability as the next manufacturing hub, with a stable and favourable tax regime. It would be interesting to see the changes brought in by the Finance Minister, which will set the economic tone for the next 5 years.