Tax for manufacturing SMEs in India
Manufacturing is a business. The 15% concessional corporate rate (Section 115BAB) has closed for new entrants, it required commencing manufacture by 31 March 2024, so a new manufacturer now pays 22% under Section 115BAA (or 25/30% under the old regime). MSME (Udyam) thresholds rose on 1 April 2025 (micro up to Rs 2.5 crore investment / Rs 10 crore turnover), and Section 43B(h) makes paying a registered micro or small supplier beyond 45 days deductible only when actually paid. Most manufactured goods are 18% GST with input credit, but credit on factory civil construction is blocked, so ring-fence it from creditable plant and machinery.
Presumptive + GST + TDS at a glance
Presumptive taxation
- Section:
- Sec 44AD (for an unincorporated micro unit)
- Deemed profit rate:
- 6% on digital receipts / 8% on other receipts
- Classification:
- business
GST treatment
- Slab:
- 18%
- SAC:
- manufactured goods at applicable HSN rate (most 18%, some 5%); regular scheme with input credit
- Composition eligible:
- Yes
- Reverse charge (RCM):
- Not applicable
TDS exposure
- —
- —
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Manufacturing is a business, and three current features shape its tax. The concessional 15% corporate rate under Section 115BAB has closed for new entrants, it required commencing manufacture by 31 March 2024 and was not extended, so a manufacturer setting up now pays 22% under Section 115BAA (or normal 25/30% under the old regime). MSME (Udyam) classification limits jumped on 1 April 2025, and Section 43B(h) now makes paying a registered micro or small supplier late a tax cost: the expense is deductible only when actually paid. For GST, most manufactured goods are 18% with input credit, but you must ring-fence creditable plant-and-machinery from non-creditable civil construction.
What business structure do manufacturing SMEs use?
The common patterns for manufacturing SMEs are: Private limited company, common for manufacturers (115BAA 22% regime, funding, MSME), LLP or partnership, for a smaller manufacturing firm, Sole proprietor, for a micro unit on 44AD. The right structure depends on revenue, liability exposure, and personal circumstances, covered below.
The corporate rate: 15% has closed, new entrants pay 22%
The 15% manufacturing rate (115BAB) closed for entrants commencing after 31 March 2024; a new manufacturer now pays 22% under 115BAA or 25/30% under the old regime. (Income-tax Act 1961 s.115BAB (15%, commence-by 31 March 2024) + s.115BAA (22%) (re-enacted in the Income-tax Act 2025))
MSME limits (raised 2025) and Section 43B(h)
MSME thresholds rose on 1 April 2025; under Section 43B(h), payment to a registered micro or small supplier beyond the MSMED 45-day limit is deductible only when actually paid. (MSMED Act 2006 ss.15-16 (45-day payment) + Income-tax Act 1961 s.43B(h) (deduction on actual payment); Udyam thresholds (Notification 1 April 2025))
GST input credit: ring-fence plant from civil works
Manufactured goods are generally 18% GST with input credit; credit on plant and machinery is allowed but credit on factory civil construction is blocked under Section 17(5). (CGST Act 2017 s.16 (input credit) + s.17(5) (blocked credit on immovable-property construction))
Allowable expenses
| Category | Examples | Tax treatment |
|---|---|---|
| Raw materials | Inputs, components, consumables | Cost of production; GST input credit under regular scheme |
| Plant and machinery | Production equipment, tools | Capitalised and depreciated; GST input credit available (ring-fence from civil works) |
| Factory running | Power, fuel, factory rent, maintenance | Deductible business expense |
| Labour and job-work | Wages, contract labour, job-work charges | Deductible; 194C TDS on job-work; pay small suppliers within 45 days (43B(h)) |
| Admin | Accounting, GST and ROC filing, software | Deductible business expense |
Vehicle and travel costs
Goods and delivery vehicles used in the business are depreciable and their running costs deductible; input credit on most motor vehicles is restricted under Section 17(5).
Capital allowances and equipment
Under the old regime a manufacturer could claim 20% additional depreciation on new plant and machinery (Section 32(1)(iia)) and 100% on in-house R&D (Section 35(2AB)), but both are forgone if you opt into the 22% 115BAA regime. The choice is lower rate versus keeping the deductions, model both.
Worked example
Shakti Components — Coimbatore, TN
new auto-components manufacturer (private limited) (2026-27)
Incorporated and commenced manufacture in 2025, after the 31 March 2024 cut-off. Registered as a small enterprise under Udyam. Buys parts from micro and small suppliers.
Because it commenced after 31 March 2024, the 15% rate under 115BAB is not available, so it opts for 22% under Section 115BAA (forgoing additional depreciation and the R&D deduction). It charges 18% GST on output with input credit, but ring-fences the creditable machinery from the non-creditable factory-building works. It pays its registered micro and small suppliers within 45 days, because any payment beyond that would be deductible only when actually paid under Section 43B(h), deferring its own deduction.
Common audit triggers for manufacturing SMEs
- Planning a new factory around the closed 15% (115BAB) rate
- Claiming GST input credit on factory civil construction (blocked under 17(5))
- Late payment to registered micro/small suppliers without applying the 43B(h) disallowance
- Using outdated (pre-April-2025) MSME thresholds for classification
- Claiming additional depreciation or R&D deduction while on the 115BAA regime (forgone)
- Inconsistent closing-stock valuation (ICDS-II)
Frequently asked questions
Can a new manufacturer get the 15% tax rate?+
What changed for MSME classification in 2025?+
What is Section 43B(h) and why does it matter?+
Can I claim GST credit on building my factory?+
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