Budget 2024: New Manufacturing Units Face Higher Costs As Tax Benefit Ends

Finance Minister Nirmala Sitharaman didn't announce any extension for the concessional tax rate for new manufacturing units, increasing costs for them.

Section 115BAB of the Income Tax Act offered companies setting up new plants in India were taxed at a lower rate of 15%. The scheme, announced in the 2019 budget, ends on on March 31, 2024.

"There were expectations of a two-year extension," Samir Kanabar, partner at Ernst & Young told NDTV Profit. "However, the tax holiday has not been set up in the budget."

Section 115BAB was initially introduced to encourage industrial investment and support the government's 'make in India' initiative. In an attempt to promote new manufacturing startups, the Ministry of Finance said it would charge a concessional tax rate of 15% instead of the standard 22% till March 31, 2024. This would thereby deduct a significant tax cost off their books.

Since the new units and facilities are capital-intensive, it takes time to set them up, said Kanabar.

Many companies expected a two-year extension to the clause slated to expire on March 31, but the interim budget did not mention any extension.

Another catch is that concessional tax only applies to new manufacturing companies that have started production at a new plant before the clause lapses.

Any company that is currently mid-construction or has already set up a new facility but will not start production at the new plant before the expiry date will not get the benefit of 15% tax regime.

That means the tax rate for them rises by 7 percentage points to 22%, translating into higher tax costs.

It will impact various sectors that have announced capex for domestic manufacturing plants in the near to long term. According to Kanabar, sectors like green hydrogen electronics manufacturing, pharma, chemicals and railways would be the worst hit.