Building a new factory? Budget may extend concessional tax rate for a year

The Union budget in July is likely to restore the concessional 15% corporate tax rate for new manufacturing facilities, a scheme introduced in 2019 that expired on 31 March this year, two persons aware of the matter said.

The plan now is to extend this scheme by one to two years to facilitate fresh manufacturing investment, which is a priority for the National Democratic Alliance (NDA) government, one of the two persons cited above said on condition of anonymity.

The Centre wants to give a strong thrust to the manufacturing sector as it could generate well-paid employment to a large number of people currently engaged in low-paid farm activities. 

Besides adding jobs, the sector could capitalize on the enhanced public spending on infrastructure, foster innovation, make Indian businesses perform better in global markets and make the economy more resilient, say experts. 

Also read | Seasonal headwinds for India’s manufacturing sector

The manufacturing sector, which accounts for 14% of the country’s gross domestic product (GDP), expanded 9.9% in 2023-24 after suffering a 2.2% contraction in the financial year prior.

India’s manufacturing activity had slipped to a three-month low of 57.5 in May as intense heatwaves led to reduced working hours. But in June, the manufacturing purchasing managers’ index increased to 58.5. A reading above 50 signals an expansion, and below that signals contraction.

A spokesperson for the finance ministry did not reply to queries emailed on Tuesday. 

A post-covid rebound

The concessional 15% corporate tax rate announced in September 2019 to attract fresh investments into manufacturing and to support ‘make in India’ efforts was in effect from FY20 till FY23, and extended by a year. 

The unexpected turn of events including the covid-19 pandemic that surfaced in December 2019, a global demand slowdown, and a synchronized interest rate tightening in developed economies, however, posed challenges to investments.

Also read | India’s labour-intensive manufacturing slump is no small worry

Investments in plants, machinery, buildings and intellectual property rights by private non-financial corporations contracted by more than 9% in the pandemic year of FY21. 

But these investments subsequently rebounded by 17.6% in FY22 and expanded further by 6.4% in FY23 to ₹19.4 trillion, show statistics ministry data. 

Investments by private non-financial corporations stood a tad below that of the household sector in FY23 at ₹21.6 trillion. Central and state governments together invested ₹6.94 trillion in FY23. 

A double boost

The move to restore favourable tax treatment to fresh investments in setting up factories comes at a time when many corporate and bank balance sheets have been cleaned up under the Insolvency and Bankruptcy Code (IBC), supporting a new cycle of private investments. 

This goes well with the other policy measures being taken up to boost manufacturing, said experts.

“The concessional 15% corporate tax rate will naturally provide a boost to the manufacturing sector; and in conjunction with production-linked incentives where they are notified, it will give a strong push to investments and job creation, besides helping to achieve self-reliance in those sectors," said Sudhir Kapadia, tax partner at EY.

This benefit is available to businesses that do not make use of any other tax incentive. Their effective tax rate including surcharge and cess could work out to about 17%. 

More new manufacturers

Data from the corporate affairs ministry show that the number of new manufacturing companies getting registered has been rising.

In FY19, 15,860 manufacturing companies were registered. This improved to over 23,000 in FY20 and remained in the range of 31,000-35,000 for the next three financial years. In FY24, 27,853 manufacturing companies were registered.

Also read | Gone are the days when a manufacturing boom would create good jobs

But to encourage more job-creation in the formal sector, Kapadia said it would make sense for the government to rationalize tax provisions.

“Deduction of a part of the additional employee cost is available to employers under section 80JJAA of the Income Tax Act where the total emoluments of the hired employees do not cross ₹25,000 a month. Because of this low threshold, it has not made the desired impact,” said Kapadia.

“To make this more effective in meeting the objective of job creation, the threshold of emoluments could be raised to about ₹100,000 a month.”