Recently the Income-tax law in India provided preferential corporate tax rates at 15% for companies that are incorporate post 1st October 2019 and establishes its manufacturing on or before 31st March 2023. This is one of the big announcement for reforms in the manufacturing sector, especially for the global multinational companies.
Such an amendment is aimed towards a push in the Make in India project and to showcase India as a manufacturing hub with one of the lowest tax cost in Asia-Pacific for manufacturing. Corporate Taxes is one of the most important criteria in global decision making for the multinationals in decisions to set up their manufacturing process. While India sits at a sweet spot in the ‘Services’ domain, such a move by the administration would boost the foreign investment in the manufacturing sector thereby leading to economic and employment growth.
Now the question to answer for attracting the Foreign Direct Investment is whether a contract manufacturing facility is covered for the eligible tax rate relief. Contract manufacturing in multinational parlance is a component of supply chain which acts as a Captive for the main manufacturing entity (or principle entity) and undertakes manufacturing at the direction of such principle entity of the group. Such a contract manufacturer typically follows a Cost-plus mechanism for pricing, thereby leaving back guaranteed minimum profits in the jurisdiction of existence. In short limited functions, limited risks and limited remuneration (which makes the case interesting)
The Income-tax Act, 1961 defines manufacturing as:
“Section 2 (29BA) “manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing,—
(a) resulting in the transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;”
Considering the above definition, a contract manufacturer is included in the term manufacturing and should be able to benefit out of the reduced corporation tax rate of 15%. Care needs to be taken to structure the transactions well to avoid any unnecessary Permanent Establishment issues as the one needs to distinguish a contract manufacturer from the toller.
While it was a case for discussion with many multinational companies, for the high rates of taxes for contract manufacturing, the lower rate of 15% would definitely overcome such discussions, thereby incentivising the multinational companies to set up their contract manufacturing units in India.
In case the reader wants to know more about the new tax incentive and the tax regime for manufacturing companies and structuring their transactions considering transfer pricing in India, the author may be contacted at email@example.com.
Transfer Pricing and International Tax Specialists