The interim Budget on Thursday failed to provide any clarity on the extension of the sunset clause applicable to newly set-up manufacturing companies.

Several industry bodies had petitioned the finance ministry for a three-year extension to the concessional tax regime of 15 per cent, which ends on March 31 this year. This was provided for by section 115BAB, introduced in 2019, to promote manufacturing in India and attract foreign companies to set up a manufacturing base in the country.

“A lack of announcement on this front has come as a surprise to the industry. Given the government’s thrust to boost manufacturing activities in India, it will augur well if the sunset date gets extended in the final Budget post the elections,” said Himanshu Parekh, Partner –Tax, KPMG in India.

‘Quite competitive’

The tax rate of 15 per cent for manufacturing companies is quite competitive or even better than the other competing economies of South East Asia such as China, Thailand, Indonesia, Vietnam, Singapore and Hong Kong, according to Ved Jain, founder, Ved Jain & Associates, a tax and audit firm.

“This has helped India in attracting various multinational companies to shift manufacturing base to India which in turn has helped in generating employment for Indian youth. It has encouraged many Indian entrepreneurs to set up manufacturing facilities in India even though the activity between 2020 and 2022 was marred by Covid,” said Jain.

An extension will help provide impetus to manufacturing given the government’s focus on growth for MSMEs and start-ups, added Raashi Shah, Partner, Illume Advisory.

“The government’s initiative in sunrise segments such as renewable energy, EV, defence and semi conductors would all require development of the entire supply chain through manufacturing. Further, the government’s focus on increasing exports and competing with the countries such as China and Taiwan also requires a push for manufacturing in India,” said Shah.

Despite the concessional tax rates – 15 per cent for new manufacturing companies and 22 per cent for all other corporates – the corporate income tax collections in January saw a net growth of 12.37 per cent y-o-y.

The lower tax rates have positively impacted the revenues of the government, boosted industrial growth and complement well with the other schemes and initiatives launched by the Centre and the States, according to experts.

Companies have to meet certain tests to qualify for the lower tax rate. For example, the company can use old plant and machinery, only if its value does not exceed 20 per cent of the total value of the plant and machinery used by the company.