As the Union Budget 2024-25 approaches, expectations for alterations in income tax provisions for the manufacturing sector are on the horizon. Despite the interim nature of the budget, the government aims to attract investments in manufacturing, particularly in areas such as electric vehicles, hydrogen fuel, and heavy industry. Emphasis is likely to be placed on bolstering initiatives like 'Make in India' and 'Aatmanirbhar Bharat' to maintain India's appeal as an investment destination.

Section 115BAB of the Income Tax Act (ITA) presently permits new companies in manufacturing to opt for a reduced tax rate of 15%, attracting significant investments. However, this benefit is contingent on the company commencing manufacturing before March 31, 2024. It is anticipated that the budget might extend this sunset clause by at least a year to sustain the positive investment sentiment in the manufacturing sector.

In the pursuit of economic growth, Section 194LC of the ITA, which taxes interest paid on External Commercial Borrowings (ECBs) at a 5% rate, might undergo a revision. The current lower tax rate on ECBs is applicable only to borrowings made before July 1, 2023. A reboot of Section 194LC is expected to stimulate low-cost investments and support economic revival.

Given the capital-intensive nature of the manufacturing sector, there is a call for the revival of asset-linked incentives. Previously, an investment allowance of 15% of the plant and machinery cost, in addition to depreciation, was introduced, and incentives for in-house research and development were provided. It is hoped that these incentives will be reintroduced to enhance India's attractiveness as a manufacturing hub, especially if the lower tax rate of 15% is phased out.

With a focus on youth employment, the government may reconsider the additional deduction of 30% of employee costs for new hires, currently limited to those earning up to INR 25,000 per month. Given the rise in salary costs, an increase in this limit is expected to allow a broader spectrum of industries to benefit from the deduction and contribute to employment generation.