Govt considers reintroducing 15% concessional corporate tax in FY26 Budget

The Centre has set up an internal committee to evaluate the benefits of the 15% concessional tax rate scheme for new domestic manufacturing units, introduced in FY20

The Government of India is evaluating the impact of the 15 per cent concessional corporate tax rate scheme for new manufacturing units, which ended on March 31, 2024, to determine whether it should be reintroduced, according to a report by The Financial Express (FE). The scheme was introduced in 2019 and was aimed at boosting private investment in the manufacturing sector by offering a competitive tax regime, in line with the ‘Make in India’ initiative.

What is a concessional corporate tax rate scheme?

The concessional corporate tax rate scheme comes under Section 115BAB of the Income Tax Act. Domestic companies, meeting certain requirements, can opt to pay a lower tax rate of 15 per cent, plus surcharge and cess.
 

 

The scheme was introduced via ordinance in September 2019, to be effective from financial year 2019-2020 (FY20), for new domestic manufacturing companies incorporated after October 1, 2019.
 

The scheme also allows companies to enjoy this lower tax rate indefinitely, unless the government rolls back or terminates the scheme.

The scheme saw significant adoption, with the number of companies opting for the concessional rate doubling from 1,244 in FY20 to 3,508 in FY21. Total income taxed under the scheme also increased from Rs 770 crore in FY21 to Rs 2,361 crore in FY22, according to data shared by FE.

One of the requirements of the scheme was that companies had to commence production by March 31, 2023, to avail the 15 per cent tax rate. This was later extended to March 31, 2024, due to pandemic-related delays.
 

Ahead of the Interim Budget 2024, EY suggested further extending the sunset date to March 31, 2025 in its Budget expectations document. However, the Interim Budget did not include any extension.

Review meeting for concessional corporate tax

Latest media reports indicate that an internal review is being set up to focus on how the scheme benefited companies and stimulated manufacturing activity. The scheme’s reintroduction might be considered in the next Budget if it is deemed successful.

Without the scheme in place, new manufacturing units will be liable to pay corporate tax of 22 per cent.

Tax scheme could help India become global mfg hub

Experts believe reintroducing the concessional tax scheme could help India become a global manufacturing hub, by reducing reliance on imports and promoting self-sufficiency. Such a scheme would attract foreign investment by providing a more competitive landscape than countries like China, Japan, Malaysia, and Vietnam.

The Budget FY25, presented on July 23, announced a reduction in the corporate tax rates for foreign companies to 35 per cent from 40 per cent to attract fresh investments from foreign-owned foreign-controlled companies (FOCC). This proposal by the Centre aims to simplify taxation, narrow the disparity between the taxes paid by domestic and foreign companies in the country, and improve foreign investments in India.

The government’s review of the 15 per cent concessional corporate tax rate scheme will likely inform future policy decisions to enhance India’s manufacturing sector and overall economic growth.