Union Budget may extend concessional tax rates for manufacturing and GCCs

The Government of India is expected to announce an extension of the concessional corporate tax rates for new manufacturing companies and Global Capability Centres (GCCs) in the upcoming Union Budget for FY2025-26.

This move comes as the existing 15 per cent tax rate under Section 115BAB of the Income Tax Act has proven instrumental in attracting investments, particularly in the manufacturing sector.

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Introduced in September 2019, the concessional corporate tax rate of 15 per cent was designed to incentivise new domestic manufacturing companies incorporated after October 1, 2019. These companies were required to commence production by March 31, 2024, to qualify for this reduced rate. The primary objective of this provision was to enhance India's competitiveness as a manufacturing hub, stimulate economic growth, and encourage capital investments and job creation.

Concessional tax rate is crucial

There is growing consensus among industry stakeholders that extending this tax regime is crucial for maintaining momentum in investment and production.

Reports indicate that the government is considering a new scheme that may offer companies a slightly higher concessional tax rate of around 18 per cent. This adjustment aims to bolster private investments and enhance India's attractiveness as a destination for foreign direct investment (FDI).

“Extending the concessional tax rate would provide an opportunity for such investors who are currently in the process of setting up or considering India as a potential investment destination to use this opportunity,” Rohinton Sidhwa, Partner, Deloitte, said.

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Industry representatives have petitioned the government to extend the sunset clause associated with the concessional tax rate. Many argue that a one-year extension is insufficient, given the challenges posed by the COVID-19 pandemic and the complexities involved in establishing manufacturing units.

The Finance Ministry has received requests from various industry bodies, including Deloitte and PwC, advocating for an extension of at least two years. They assert that extending this tax incentive will support existing investors and attract new players to consider India as a viable investment destination.

Economic Impact

The existing concessional tax regime has had a substantial impact on India's economic landscape:

Attracting foreign investment: The lower tax rate has made India an appealing option for foreign investors looking to establish manufacturing operations. For instance, FDI inflows surged from ₹89,766 crore in FY2020-21 to ₹1,58,332 crore in FY2021-22 — a remarkable increase of 76 per cent.

Stimulating domestic manufacturing: The government aims to boost local production capabilities and reduce reliance on imports by offering financial incentives. This aligns with initiatives such as "Make in India," which seeks to position India as a global manufacturing hub.

Creating employment opportunities: Establishing new manufacturing units is expected to generate significant job opportunities across various sectors. With GCCs also expanding their workforce — projected to grow by 20 per cent in 2025 — this trend will likely continue.

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Global Capability Centres

In addition to supporting new manufacturing companies, there is a growing recognition of the importance of GCCs in India. Over the past five years, GCCs have risen dramatically to approximately 1,700, generating revenues estimated at $64.6 billion. This sector is projected to expand further, expecting to reach around 2,100–2,200 GCCs by 2030.

GCCs provide critical support functions for parent or group entities across various sectors. Their growth contributes significantly to employment and enhances India's reputation as a global hub for business services and innovation.

Given their expansion potential and contribution to job creation, industry experts are advocating for similar tax benefits — a lower rate of around 15 per cent — to be extended to GCCs as well. This would further incentivise investments in this burgeoning sector and align with broader economic goals.

The GCCs in India do not currently benefit from a fixed concessional tax rate of 15 per cent. Instead, the tax rate for GCCs is generally aligned with the standard corporate tax rates applicable to domestic companies, which can be around 25 per cent or higher, depending on various factors and incentives claimed.

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The potential extension of concessional corporate tax rates reflects a strategic approach by the Indian government to sustain momentum in both the manufacturing sector and GCCs. As discussions intensify ahead of the Union Budget presentation for FY2025-26 on February 1, stakeholders remain hopeful that such measures will support existing investors and attract new ones.

By fostering a conducive environment for investment through favourable tax policies, India can position itself as a competitive global manufacturing hub while enhancing its appeal as a destination for GCCs. This dual approach could drive economic growth and job creation in the coming years.