Manufacturing Business - Accounting for Startup

Manufacturing companies and industries in India are subject to various rules, taxation norms, and compliances. These depend on the scale of operations, type of business structure (sole proprietorship, partnership, private limited, etc.), location, and the nature of goods produced. Below is a comprehensive guide on taxation rules and compliances for manufacturing companies and industries in India:

1. Types of Manufacturing Companies and Business Structures

Manufacturing companies in India can operate under various business structures, each having distinct tax implications and regulatory requirements. The most common structures are:

A. Sole Proprietorship

• A single owner runs the business.
• It’s simple to form but the liability is unlimited.
• Suitable for small-scale manufacturing operations.

B. Partnership Firm

• Owned by two or more individuals.
• Governed by the Partnership Act, 1932 or Limited Liability Partnership Act, 2008 (for LLPs).
• Liability is shared among partners.
• Taxation: A flat rate of 30% tax on the income of partnership firms.

C. Private Limited Company

• A separate legal entity from its owners.
• Limited liability for shareholders.
• Suitable for medium to large-scale manufacturing units.
• Taxation: Corporate tax rate applicable.
• Must comply with Companies Act, 2013 and regulations of the Ministry of Corporate Affairs (MCA).

D. Public Limited Company

• A company that offers shares to the public.
• Typically, large-scale manufacturing units with a broad shareholder base.
• Corporate tax rate applies, along with stricter regulatory requirements.

E. Limited Liability Partnership (LLP)

• A hybrid of a partnership and a private limited company.
• Offers limited liability protection and less compliance burden than a private limited company.
• Taxed at 30% on income.

2. Taxation for Manufacturing Companies in India

Manufacturing companies are taxed based on their income and business structure, as outlined below:

A. Corporate Tax Rates

• Domestic Companies:
  • Normal Rate: 22% (without exemptions/deductions) under section 115BAA.
  • Manufacturing Companies: 15% (new domestic manufacturing companies) under section 115BAB, if incorporated on or after October 1, 2019, and starting production before March 31, 2024.
  • Surcharge & Cess: A 10% surcharge is applicable on income exceeding ₹1 crore, and health and education cess of 4% is levied on the total tax liability.
• Foreign Companies:
  • Taxed at a rate of 40%.
  • Surcharge: 2% on income exceeding ₹1 crore, 5% on income exceeding ₹10 crore.

B. Minimum Alternate Tax (MAT)

• MAT ensures that companies with large profits but minimal tax liabilities due to exemptions and deductions pay a minimum tax.
• MAT rate is 15% of the book profit (applicable to companies not opting for concessional tax rates under sections 115BAA and 115BAB).

C. Goods and Services Tax (GST)

• GST is levied on the supply of goods, including manufacturing.
• GST Rates: Depends on the nature of the goods:
  • Raw materials, intermediate goods, and machinery typically attract 18%.
  • Essential goods (like food) may have lower rates (5% or 12%).
  • Luxury goods or items with negative social impact (like tobacco) may have rates up to 28%.
• Input Tax Credit (ITC): Manufacturers can claim a refund on the GST paid for inputs used in the production process, thereby avoiding tax cascading.

D. Excise Duty (for certain products)

• Post-GST, excise duty is levied only on specific goods like petroleum and alcohol. Manufacturers of these products must comply with excise duty laws.
• Rate: Varies based on the type of product.

3. Key Compliance Requirements for Manufacturing Companies

A. Registration and Licensing

1. Incorporation: For companies and LLPs, registration with the Ministry of Corporate Affairs (MCA) is mandatory.
2. Factory License: As per the Factories Act, 1948, any manufacturing unit with 10 or more workers (with power) or 20 or more workers (without power) must obtain a factory license from the respective state government.
3. MSME Registration: For small and medium enterprises, registering as an MSME (Micro, Small, and Medium Enterprises) provides access to various government benefits like subsidies, tax exemptions, and easier access to credit.
4. Pollution Control Clearance: If the manufacturing unit deals with any environmental pollutants, clearance from the State Pollution Control Board (SPCB) is required. Compliance with the Environment Protection Act, 1986 and other environmental laws is mandatory.
5. Import Export Code (IEC): Required for manufacturers involved in import and export of goods. It is issued by the Directorate General of Foreign Trade (DGFT).

B. Annual Compliance with MCA

• Annual Financial Statements and Audit Reports: All companies must prepare and submit audited financial statements annually.
• Board Meetings and General Meetings: Companies must conduct board meetings and annual general meetings (AGMs) as per Companies Act, 2013.

C. Tax Filing and Compliance

1. Income Tax Return (ITR): All manufacturing companies must file their ITR with the Income Tax Department annually, disclosing their taxable income, deductions, and tax paid.
2. GST Compliance: Manufacturers need to:
   • File monthly/quarterly GST returns (GSTR-1, GSTR-3B, etc.).
   • Maintain proper records of sales, purchases, and input credits.
   • File annual GST returns (GSTR-9).
3. Tax Deducted at Source (TDS): Manufacturing companies must deduct tax at source (TDS) for payments like salaries, rent, contractor payments, etc., and file TDS returns quarterly.
4. Transfer Pricing Rules: If the manufacturing company engages in international transactions with related parties, it must comply with transfer pricing regulations, maintain proper documentation, and ensure that transactions are conducted at arm’s length.

D. Labour Law Compliance

1. Provident Fund (PF) & Employee State Insurance (ESI): Manufacturing companies with more than 10 employees must register for EPF and ESI and contribute toward employee welfare funds.
2. Employee Welfare and Safety: Compliance with labour laws such as the Payment of Wages Act, Minimum Wages Act, and Factories Act is mandatory.
3. Contract Labour Regulation: If the company employs contract workers, it must comply with the Contract Labour (Regulation and Abolition) Act, 1970.

4. Customs Duty for Manufacturers

• Manufacturers involved in the import or export of goods are subject to customs duties. These duties vary based on the type of goods imported or exported and international trade agreements.
• Customs Duty Rates: Custom duties on raw materials or intermediate goods used in manufacturing can range from 5% to 25%, depending on the product category.

5. Compliance with Sector-Specific Laws

Certain manufacturing industries have additional compliance obligations based on the nature of their products:

• Food Manufacturing: Requires licenses from the Food Safety and Standards Authority of India (FSSAI).
• Pharmaceuticals: Manufacturers must comply with the Drugs and Cosmetics Act, 1940 and obtain licenses from the Central Drugs Standard Control Organization (CDSCO).
• Electronics & IT: Compliance with the Bureau of Indian Standards (BIS), E-Waste Management Rules, and other relevant norms is required.

6. Incentives and Subsidies for Manufacturing Companies

• Make in India Initiative: The government offers several incentives for manufacturing under the "Make in India" scheme, including tax exemptions, capital subsidies, and easier access to credit.
• Production-Linked Incentive (PLI) Scheme: Aimed at boosting domestic manufacturing in sectors like electronics, automobiles, pharmaceuticals, and textiles, offering subsidies and tax incentives.
• Export Promotion Capital Goods (EPCG) Scheme: Allows manufacturers to import capital goods at zero customs duty if they commit to exporting products worth multiple times the value of the imported goods.

7. Audit and Accounting Regulations for Manufacturing Companies

• Statutory Audit: Manufacturing companies must undergo a statutory audit every financial year and maintain books of accounts in accordance with the Companies Act, 2013.
• Cost Audit: For certain industries (like pharmaceuticals, chemicals, and metals), a cost audit is mandatory as per the Cost Accounting Records Rules.
• Internal Audit: Companies with a turnover exceeding a certain threshold are required to conduct internal audits.

8. Recent Amendments and Updates

• Reduction in Corporate Tax: India recently reduced the corporate tax rate to 22% (without exemptions) and 15% for new manufacturing units, effective from FY 2020-21, to boost the manufacturing sector.
• Labour Code: The Code on Wages, 2019, and other new labour laws simplify the regulatory environment for manufacturers, consolidating existing laws and reducing the compliance burden.

Conclusion

Manufacturing companies in India must navigate a complex web of regulations and tax rules, depending on their size, location, industry, and business structure. Compliance with taxation rules, labor laws, environmental norms, and specific industry regulations is critical to avoid legal penalties and optimize operational efficiency. The government, through initiatives like “Make in India,” provides various incentives to promote manufacturing, making it an attractive sector for business expansion.