The net economics of an India plant are decided less by the headline incentive than by four things that sit underneath it: the corporate-tax rate on the profit, the customs treatment of imported inputs, how related-party purchases and royalties are priced, and the FEMA route for the money in and out. Each carries a trap that has caught foreign manufacturers, and one of them is a rate that many still assume and that has, in fact, lapsed. This guide sets out the current position on each.
At a glance
- the section 115BAB 15% manufacturing rate has sunset; a new manufacturer generally pays the ordinary regime;
- manufacturing generally permits 100% FDI under the automatic route, subject to the land-border approval rule;
- customs duty on inputs, and any inverted-duty structure, can quietly erode a plant's margin;
- related-party imports, royalties and technical-service fees are the manufacturer's main transfer-pricing exposure;
- repatriation of profit and fees carries withholding, mitigated where a tax treaty applies and substance supports it.
Corporate tax: the 15% rate has lapsed
For several years India offered new manufacturers a concessional 15% corporate-tax rate under section 115BAB, an effective rate of about 17% with surcharge and cess, on the condition that the company was incorporated on or after 1 October 2019 and commenced manufacturing by 31 March 2024. That window has closed. A manufacturer that did not begin production by the deadline does not get the 15% rate, and a new entrant today generally pays under the ordinary concessional regime in section 115BAA, around 22% before surcharge and cess, or the normal rates, unless the deadline is reinstated by a future Budget. This is the single most common misconception in a manufacturing business case, and the plant's tax cost should be modelled on the ordinary regime, not the lapsed 15%.
The 115BAB regime also came with conditions worth remembering in case it returns: the company could not be formed by splitting an existing business, could not use significant second-hand machinery, and could not combine the rate with other incentives. The interaction with incentives matters, because a concessional-rate election and a PLI or SEZ benefit do not always sit together, which is part of why the tax and incentive positions are designed as one.
The rate options, in short
Because the headline rate so often drives the model, it is worth stating the options plainly. A manufacturer that commenced by 31 March 2024 may still hold the section 115BAB rate of 15%, an effective rate of roughly 17% with surcharge and cess, for its life. A new entrant cannot elect it. It generally chooses instead between the section 115BAA concessional regime, a 22% rate and an effective rate of about 25% with surcharge and cess, which forgoes most other deductions, and the ordinary rates with those deductions retained.
The election interacts with the incentive strategy, and the interaction is favourable more often than people assume. A PLI benefit is a cash incentive on production rather than a tax holiday, so it can generally sit alongside the 115BAA rate, whereas a profit-linked tax holiday such as the old SEZ section 10AA benefit could not. The practical task is therefore to model the after-tax return on the regime actually available, not the lapsed 15%, and to choose the corporate-tax election alongside the incentive plan rather than separately, so the two reinforce each other instead of cancelling out.
FEMA: the route in, and the money out
Manufacturing generally permits 100% foreign investment under the automatic route, so a foreign manufacturer can fund and own its Indian plant without prior approval, subject to the usual post-investment reporting such as the FC-GPR filing. The exception that matters is Press Note 3 of 2020: investment from a country sharing a land border with India, or with beneficial ownership there, needs prior government approval whatever the sector, which can catch component suppliers and some diversification structures. On the way out, dividends, royalties and service fees can be repatriated subject to the applicable withholding tax, which a tax treaty can reduce where the recipient has genuine substance and beneficial ownership. Designing how returns come out, and at what withholding cost, belongs at entry, not at the first dividend.
Customs and the inverted-duty trap
A plant that imports inputs lives or dies partly on customs. Basic customs duty applies to imported components and capital goods, and the structure of those duties can create an inverted-duty problem, where the duty on imported inputs is higher than on the finished good, squeezing the margin of a manufacturer that assembles locally from imported parts. The PLI schemes and various export incentives are, in part, designed to offset this, and export-oriented plants can recover or avoid duties through the applicable schemes. The practical work is to map the duty on the specific input bill against the finished-goods duty and the available offsets before committing the supply chain, because an inverted structure left unplanned can quietly turn a viable plant into a marginal one.
Transfer pricing for a manufacturer
A foreign manufacturer's transfer-pricing exposure is different from a services captive's. It sits in the related-party transactions a plant typically runs with its group: importing components and raw materials from affiliates, paying royalties for the use of the parent's technology or brand, and paying technical-service or management fees. Each must be priced at arm's length and documented, and the Indian authority scrutinises royalty and technical-fee payments to a foreign parent particularly closely, because they move profit out of India. A plant that imports from its group and pays the parent a royalty has two transfer-pricing fronts to defend, not one, and the policy and documentation for both should be set before the transactions run, with the statutory report and local file maintained each year.
Putting the economics together
The four pieces interact, which is why they are analysed together. The corporate-tax rate, now the ordinary regime rather than 15%, applies to a profit that transfer pricing on imported inputs and royalties helps determine; the customs position sets the landed cost that feeds that profit; and the FEMA and withholding position sets what the parent actually receives. A business case that models the incentive but assumes the lapsed 15% rate, ignores an inverted-duty bill and underprices the royalty to the parent is not a business case the tax authority will recognise. Building the tax, customs, transfer-pricing and FEMA position as one is what makes the plant's economics both efficient and defensible.
Where this goes wrong
- Assuming the 15% rate. Section 115BAB has sunset for manufacturers that did not commence by 31 March 2024; modelling on it overstates the after-tax return.
- Ignoring inverted duties. Higher duty on inputs than on finished goods can erode margin; it must be mapped against offsets before the supply chain is set.
- Underpricing royalties and tech fees. Payments to the parent for technology and services are closely examined; an unsupported charge invites adjustment and penalty.
- Overlooking Press Note 3. Land-border-linked investment needs government approval, which a manufacturing supply chain can easily involve.
- Designing repatriation late. The withholding cost of getting profit and fees out should be planned at entry, with the treaty position and substance in place.
How ATB Corporate helps
We build and defend the tax position of a foreign manufacturer's India plant: the corporate-tax regime now that 115BAB has lapsed, the FEMA route and any Press Note 3 approval, the customs and inverted-duty analysis against the available offsets, and the transfer-pricing policy and documentation for imported inputs, royalties and service fees. We design the repatriation and treaty position at entry, so the plant's economics hold when the position is examined.
Talk to ATB about your India manufacturing tax position →
FAQ
Do new manufacturers in India still get the 15% tax rate?
Generally no. The section 115BAB 15% rate applied only to companies that commenced manufacturing by 31 March 2024; that window has closed, so a new entrant typically pays under the ordinary regime, around 22% under section 115BAA before surcharge and cess, unless a future Budget reinstates it.
Can a foreign manufacturer own its plant 100%?
Generally yes. Manufacturing usually permits 100% FDI under the automatic route, subject to the usual reporting and to the Press Note 3 approval requirement for investment from land-border countries.
What is the inverted-duty problem?
It arises when customs duty on imported inputs is higher than on the finished good, squeezing the margin of a manufacturer assembling locally from imported parts. It should be mapped against PLI and export offsets before the supply chain is committed.
What is the main transfer-pricing risk for a manufacturer?
The related-party transactions a plant runs with its group, imported components, royalties for technology or brand, and technical-service fees, all of which must be priced at arm's length and documented. Royalty and technical-fee payments to a foreign parent are scrutinised especially closely.
How is profit repatriated, and what does it cost?
Through dividends, royalties and service fees, subject to the applicable withholding tax, which a tax treaty can reduce where the recipient has genuine substance and beneficial ownership. The withholding position should be designed at entry.
Key references
Income-tax Act sections 115BAB and 115BAA; FEMA (Non-Debt Instruments) Rules, Press Note 3 of 2020 and FC-GPR reporting; the Customs Tariff and export schemes (for example RoDTEP); the Income-tax transfer-pricing provisions.
This article is general information and not tax or legal advice. Laws and IFSCA rules change, and positions should be confirmed for your specific circumstances before being relied upon.