Software isn’t manufacturing, won’t be eligible for 15% tax

NEW DELHI: Software development is not manufacturing and will not be eligible for the 15% tax rate applicable to new manufacturing entities, a government official said.The government will table a Bill in Parliament in the upcoming winter session to clarify this and other related matters. The Bill will replace its earlier ordinance in September.”The amendment Bill will clarify that 15% corporate tax rate is only for new manufacturing entities and that software development is not manufacturing,” the official, who is privy to the development, told ET.The amendment comes after industry sought clarity on whether software development could be treated as manufacturing and be eligible for the reduced tax rate.

On September 20, finance minister Nirmala Sitharaman slashed the corporate tax rate to 22% for companies that do not seek exemptions or incentives, and to 15% — from the current 25% — for new manufacturing companies.Any new domestic company incorporated on or after October 1 making fresh investment in manufacturing and starting operations before March 31, 2023, will pay tax at 15%.The reduction has made the country one of the lowest tax jurisdictions in South and Southeast Asia.The government is also likely to clarify a host of other things, including on unabsorbed depreciation and accumulated Minimum Alternate Tax (MAT) credit in the proposed Bill. It will further clarify that carry forward loss will also not be allowed in case an amalgamated entity opts for the 22% corporate tax rate without incentives.The government issued a circular in October specifying that a company opting for the reduced rate of 22% cannot avail of accumulated MAT credit. This will also be part of the proposed amendments.Manufacturing has been defined in other sections of the Income Tax Act, but the latest ordinance does not include a definition or refer to one.A Supreme Court judgement has, however, made it clear that manufacturing means a change, bringing into existence a new and distinct object or article or thing with a different chemical composition or integral structure.Only new manufacturing companies are eligible for the revised rate. The provision excludes entities formed by splitting up or reconstructing a business already in existence.An exception, however, has been provided for natural or man made calamities, riots and fire that require an entity to be re-established, reconstructed or revived on or after October 1.

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