Understanding Section 115BAE of the Income Tax Act: Tax on Income of Certain New Manufacturing Co-operative Societies

The introduction of Section 115BAE in the Income Tax Act, effective from April 1, 2024, marks a significant development for newly established manufacturing co-operative societies in India. This section aims to encourage the growth of the manufacturing sector by offering a special concessional tax rate. In this blog, we will delve into the provisions, conditions, and implications of Section 115BAE, providing a comprehensive guide for co-operative societies considering this tax option.

Table of Contents

1. What is Section 115BAE?
2. Eligibility Criteria
3. Conditions for Tax Computation
4. Special Tax Rates and Provisions
5. Advance Tax, Surcharge, and Cess
6. Impact of Transfer Pricing Regulations
7. Comparing Section 115BAE with Other Tax Provisions
8. Conclusion
9. FAQs

What is Section 115BAE?

Section 115BAE is a newly introduced provision under the Income Tax Act, effective from April 1, 2024, specifically targeting manufacturing co-operative societies in India. This section provides an optional concessional tax regime, allowing eligible co-operative societies to pay income tax at a reduced rate of 15%, subject to certain conditions. It aims to incentivize the establishment and growth of new manufacturing units, thus bolstering India’s manufacturing sector.

Eligibility Criteria

To avail of the benefits under Section 115BAE, a co-operative society must meet the following criteria:

1. Setup and Registration: The co-operative society should be set up and registered on or after April 1, 2023.
2. Commencement of Manufacturing or Production: The society must have commenced manufacturing or production of an article or thing on or before March 31, 2024.
3. Business Formation: The business should not be formed by splitting up or reconstructing an existing business.
4. Usage of Machinery or Plant:
   • The society must not use any previously used machinery or plant.
   • Exceptions: Imported machinery or plant used abroad, not previously installed in India, is considered new if no depreciation has been claimed on it by any other entity.
   • Up to 20% of the machinery or plant value can be from previously used machinery, provided it is not the primary component.
5. Nature of Business:
   • The co-operative society must be engaged solely in the business of manufacturing, production, and related research or distribution.
   • Generation of electricity qualifies, but activities such as software development, mining, bottling of gas, printing, and cinematograph film production are excluded.

These criteria ensure that only genuinely new manufacturing ventures benefit from the concessional tax rate.

Conditions for Tax Computation

Under Section 115BAE, the total income of an eligible co-operative society should be computed considering the following:

1. Exclusion of Specific Deductions:
   • No deductions are allowed under sections like 10AA (Special Economic Zones), 32(1)(iia) (additional depreciation), 33AB (tea, coffee, and rubber development account), 33ABA (site restoration fund), 35AD (specified businesses), and certain provisions under Chapter VI-A (excluding Section 80JJAA).
2. Non-Applicability of Set-off for Losses and Depreciation:
   • Losses or depreciation from previous years cannot be set off if they are related to deductions disallowed under Section 115BAE.
   • Such losses are considered fully absorbed and will not be available for future years.
3. Calculation of Depreciation:
   • Depreciation must be claimed under Section 32, except additional depreciation under Section 32(1)(iia), and determined as prescribed.

Special Tax Rates and Provisions

Section 115BAE provides for different tax treatments based on the nature of the income:

1. Primary Income Tax Rate: The tax rate on total income is 15%, applicable only if the income is derived from manufacturing or production.
2. Non-Manufacturing Income:
   • Income not connected to or incidental to manufacturing is taxed separately, without allowing any deductions for related expenses.
3. Short-Term Capital Gains:
   • Gains from the transfer of capital assets, where depreciation is not allowable under the Act, will be taxed at 22%.
4. Failure to Meet Conditions:
   • If the co-operative society fails to meet the specified conditions in any previous year, the option to avail the concessional tax rate becomes invalid for that year and all subsequent years. The society will then revert to the standard tax regime.

Advance Tax, Surcharge, and Cess

For societies opting for Section 115BAE, the following additional levies apply:

1. Surcharge: A surcharge of 10% is levied on the tax payable.
2. Health and Education Cess: A 4% cess is charged on the combined tax and surcharge.
3. Advance Tax Requirements: Societies must comply with the advance tax payment norms applicable to this concessional regime.

These levies ensure that even under a concessional tax rate, the overall tax burden remains balanced.

Impact of Transfer Pricing Regulations

Section 115BAE also addresses scenarios where there is a close connection between the co-operative society and another entity, potentially affecting the fairness of transactions:

1. Arm’s Length Price Requirement: If the business arrangement results in more than ordinary profits due to a close relationship, the Assessing Officer may adjust the profits to reflect the arm’s length price.
2. Specified Domestic Transactions: When specified domestic transactions are involved, profits are computed based on transfer pricing rules.
3. Tax on Excess Profits: Any profits deemed to exceed the ordinary amount may be taxed at a higher rate of 30%.

This provision ensures fair taxation in situations involving related party transactions.

Comparing Section 115BAE with Other Tax Provisions

While Section 115BAE offers a significant tax concession, it differs from other sections such as 115BAD, which applies to other types of co-operative societies, or the standard tax regime applicable to co-operative societies under the Income Tax Act. Here’s a brief comparison:

Parameter	Section 115BAE	Section 115BAD	Standard Tax Provisions
Eligibility	New manufacturing co-operatives set up after 2023	Other co-operatives	All co-operatives
Tax Rate	15%	22%	Varies
Conditions for Deductions	Limited deductions allowed	Limited deductions allowed	Standard deductions as per the Act
Special Tax on Capital Gains	22% on short-term gains without depreciation	30% on specified gains	Varies based on the asset and holding period

This comparison helps to understand the unique benefits and requirements under Section 115BAE.

FAQs

1. What is the concessional tax rate under Section 115BAE?
   The concessional tax rate under Section 115BAE is 15%, subject to certain conditions.
2. Can a society opt out of Section 115BAE after choosing it?
   No, once the option is exercised, it cannot be withdrawn for the same or any subsequent assessment years.
3. What happens if a society fails to meet the conditions in any year?
   The option for the concessional rate becomes invalid, and the society will be taxed under the standard provisions of the Income Tax Act.
4. Are all manufacturing activities eligible under Section 115BAE?
   No, certain activities like software development, mining, and gas bottling are excluded.
5. How is the surcharge calculated for societies under Section 115BAE?
   A 10% surcharge is levied on the tax payable, along with a 4% health and education cess.

Conclusion

Section 115BAE of the Income Tax Act presents a compelling option for newly established manufacturing co-operative societies to reduce their tax burden, thus fostering growth in India’s manufacturing sector. By offering a lower tax rate and setting clear conditions, the provision aims to support genuine new investments while maintaining fair tax practices. Eligible co-operative societies should carefully evaluate the benefits and compliance requirements before opting for this concessional regime.

For more in-depth guidance and expert advice, visit www.smarttaxsaver.com.