How does a company benefit from the reduced tax rate of 15 percent?

As already berichtet, the Indian government reduced the corporate income tax rate for new (!) manufacturing companies to 15 percent.

Taxation applies to all those companies (domestic companies), which were incorporated on or after October 1, 2019, and begin production on or before March 31, 2023. In these cases, the new tax rate applies retroactively from April 1, 2019.

Including all surcharges and levies, the new effective tax rate for manufacturing companies is 17,16 percent (formerly 28,60 and 34,32 percent).

Questions & Answers

Q: Our Indian branch produces certain products locally and others are imported from Europe. Can we apply the reduced tax rate of 15 percent?

On a! To get the maximum tax benefit, you are only allowed to sell locally manufactured products in India.

Q: Does pure assembly also count as production for reduced tax purposes?

A: Basically yes, but only under the following conditions: The prefabricated part must have a new name, have new properties, serve a new use, be movable and “saleable”.

Q: Is it necessary to source locally too? If yes, what percentage?

A: There are no requirements regarding sourcing.

Q: We have just set up a company in India but are not producing yet. Can we still benefit from the 15 percent tax?

A: No, the effective date for founding is October 1, 2019. If you meet all other criteria, liquidating the company you have already founded and setting up a new company will probably be worthwhile.

Q: How can we optimize tax burden and costs when we produce in India but also import?

A: For every existing company that has decided to switch to the new tax law (but then without making use of old tax allowances and other support programs), a reduced new (basic) tax rate of 22 percent (formerly 25 or 30 percent) already applies today. please refer here).

At a later date, once you actually produce in India, you could set up a new entity (100% Manufacturing Unit) that would benefit from the reduced tax rate of 15 percent. This new production company could then sell the locally produced finished parts to your Indian trading company. In addition, certain synergies can probably be realized in the management of both entities.

It is important, for example, that the trading company does not invest in production machines. However, a piece of land can be purchased by your trading company today and the required part can be rented out to your production company later.

Any further questions about income tax…?

If you have any further questions about Indian tax law, please contact our department head Karsten Echle.