Companies are putting assets together for new manufacturing facilities

Companies seek to benefit from the lower corporate tax regime announced for new manufacturing companies. The existing companies are planning land deals and transfers of plant and machinery to put together the necessary manufacturing facilities. 

The effective tax rate has been brought down to 17.16% for companies set up on or after 1 October 2019 but on or before 31 March 2023. The conditions for availing the low tax benefit include payment of regular taxes without claiming any tax incentives. 

The effective tax rate now is one of the lowest in the world and also brings Indian corporates close to other Asian economies. Corporates are consulting tax experts on various options available for structuring the manufacturing facilities.

Also Read: Tax Incentives and Exemptions for Auto Sector Encourages ‘Make in India’

Corporates are making land purchases adjacent to an existing facility, catering to the same customers and transferring machinery bought on behalf of the new company. However, an issue arises whether these transactions would constitute new business or restructuring of an existing business. The income tax department could raise questions on the constitution of the new manufacturing facilities.

Tax experts are of the view that the transactions mentioned above should not pose a problem in the setting up of new manufacturing facilities. A sale of an asset to a related party or a third party should not amount to a restructuring of business.

Many companies had changed their expansion plans after the announcement of lower corporate tax rates. Companies have been considering the option to set up a new entity to house the new manufacturing facilities. The option would enable companies to bring down their overall effective tax rate.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in