As already reportsthe Indian government reduced the corporate income tax rate for new (!) manufacturing companies to 15 percent.
The taxation applies to all those companies (domestic companies) that are incorporated on or after October 1, 2019, and commence production on or before March 31, 2023. The new tax rate will apply retrospectively from 1 April 2019 in these cases.
Including all surcharges and duties, the new effective tax rate for manufacturing companies is therefore 17.16 percent (previously 28.60 and 34.32 percent respectively).
Questions & Answers
Q: Our Indian subsidiary produces certain products locally and others are imported from Europe. Can we apply the reduced tax rate of 15 percent?
A: No! To avail the maximum tax benefit, you must distribute only locally manufactured products in India.
Q: Does pure assembling also count as production with regard to reduced taxation?
A: In principle, yes, but only under the following conditions: The finished part must have a new name, have new properties, serve a new use, be movable and "salable".
Q: Is it necessary to source locally as well? If so, what percentage?
A: There are no specifications regarding sourcing.
Q: We have just set up a company in India but are not manufacturing yet. Can we still benefit from the 15 percent taxation?
A: No, the effective date of incorporation is October 1, 2019. If you meet all other criteria, it is likely that liquidation of your already incorporated company, as well as new incorporation, will pay off.
Q: How can we optimize tax burden and costs when we manufacture in India but also import?
A: For any existing company that has decided to change to the new tax law (but then without claiming old tax allowances and other subsidy programmes), a reduced new (basic) tax rate of 22 per cent (formerly 25 or 30 per cent - see here).
At a later stage, i.e. once you are actually manufacturing in India, you could set up a new entity (100% Manufacturing Unit) which would benefit from the reduced tax rate of 15 per cent. This new manufacturing entity could then sell the locally produced finished parts to your Indian trading company. In addition, certain synergies in the management of both entities are likely to be realized.
Here, for example, it is important that the trading company does not make capital expenditures for the machinery of production. However, a plot of land can be purchased by your trading company today, and the required part can be rented to your production company later.
Any other questions about the Income Tax...?
If you have any further questions regarding Indian tax law, please contact our head of department Karsten Echle.