Tax incentive provisions normally have conditions applicable for the period within which the preferred activity should be undertaken and the period for which the tax incentive is available. It may also be necessary to fulfil certain other conditions such as ‘forming’ of a ‘new’ undertaking.
Real Estate Investment Trusts (REITs)/Infrastructure Investment Trusts (InvITs)
The Securities and Exchange Board of India (SEBI) has enacted regulations relating to two categories of investment vehicles, namely REITs and InvITs.
Pass-through status is provided to REITs in respect of income earned from renting, leasing, or letting out any real estate asset owned directly by the REITs. Thus, rental income is exempt in the hands of REITs. On distribution of rental income, REITs are not required to withhold taxes. Tax is not required to be withheld by tenants on payment of rent to the REITs.
The interest paid by special purpose vehicles (SPVs) to business trusts (BTs) is taxable at the investor level (as against the BT itself) when the BT distributes such amounts. Interest income to non-resident investors is taxable at a lower rate of 5% (plus applicable surcharge and cess), whereas residents are taxable at the applicable tax rates.
Dividends distributed by SPVs to the BTs are exempt from levy of DDT in the hands of the SPV. Such dividends are also exempt in the hands of BTs and investors if 100% of the equity shares of the SPV are held by BTs, except in case of shares mandatorily held by another entity as per law, and the dividends are distributed out of profits made after the acquisition of the SPV by BTs. Capital gains (e.g. on sale of shares of SPVs) are taxable in the hands of BTs at the applicable capital gains tax treaty rates. Any other income (including rental income) is taxable at the maximum marginal rate. Onward distributions of such income are exempt in the hands of the investors.
Transfer of units of BTs through stock exchanges are liable to STT, and gains earned by investors on such sale of units are exempt from tax if the units qualify as long-term capital assets. A lower rate of 15% (plus applicable surcharge and cess) is applicable to short-term capital assets. Taxability of capital gains arising to sponsors on exchange of shares in SPVs with units of BTs is deferred to the time of disposal of such units by the sponsor. The applicability of MAT on gains arising from the swap of shares of the SPV for units of BT is deferred to the stage when the units are transferred by the BT. No capital gains tax exemption is available on the swap of other assets with units of BTs.
Tax incentives for undertakings other than infrastructure development undertakings
New industrial undertakings located in ‘backward’ states and districts notified as such are entitled to full tax exemption of profits for the first three or five years of operation, followed by a partial tax exemption of 30% of profits for the next five years. The list of 'backward' districts has been categorised into category A and category B districts, depending upon the current level of infrastructure development in those areas. The initial tax holiday period is five years in the case of category A districts and three years in the case of category B districts. A similar incentive is also applicable for hotels satisfying prescribed conditions.
If certain conditions are met, a tax holiday is permitted on the profits earned by an undertaking engaged in any of the following:
- Integrated business of handling, storage, and transportation of food grains.
- Developing and building of housing project.
- Scientific research.
- Commercial production or refining of mineral oils.
- Setting up and operating a cold chain for agricultural produce.
- Processing, preservation, and packaging of fruits or vegetables.
- Operating and maintaining a hospital in a rural area.
The tax holiday periods range from five to ten years, and the percentage of the rebate is 30%, 50%, or 100% in initial years and 30% in the later years. The number of years constituting ‘initial’ and ‘later’ years varies from sector to sector.
A relaxation of 100% shall be provided under certain conditions to avail of profit-linked deduction in the business of developing qualifying affordable housing projects. The conditions are as follows:
- Size of residential until will be measured as ‘carpeted area’ and not a ‘built-up area’.
- Completion of project for claiming deduction will be increased from three years to five years from receipt of approval.
- Size restriction of 30 square metres for residential units shall apply only to metro cities (i.e. municipal limits of Chennai, Delhi, Kolkata, and Mumbai).
Tax incentives for infrastructure development undertakings
Enterprises engaged in the business of power generation, transmission, or distribution; developing or operating and maintaining a notified infrastructure facility, industrial park, or SEZ; substantially renovating and modernising the existing network of transmission or distribution lines (between specified periods); or laying and operating a cross-country natural gas distribution network are eligible for a tax exemption of 100% of profits for any ten consecutive years falling within the first 15 years of operation (first 20 years in the case of infrastructure projects, except for ports, airports, inland waterways, water supply projects, and navigational channels to the sea).
An investment-linked deduction will be available to Indian companies or their consortium engaged in the business of developing or operating and maintaining of a new infrastructure facility. The taxpayers should have entered into an agreement with the Central or State Government or local authorities in respect of such activities relating to specified infrastructure facilities. This is effective from tax year 2017/18 onwards.
Since now there are investment-linked deductions, the profit-linked deduction available for infrastructure facilities have a sunset clause of 31 March 2017 for commencement of the operations. Thereafter, deduction of 100% of capital expenditure incurred on setting up of the said infrastructure facility will be available with effect from 1 April 2017. Investment-linked deductions in respect of specified capital expenditure shall not be allowed if incurred for the purpose of acquisition of asset for payment (individual or aggregate) exceeding INR 10,000 per day unless such payment was made:
- by an account payee cheque/draft, or
- through electronic clearing system through a bank account.
This is effective from tax year 2018/19 onwards.
'Infrastructure facility' means roads, including toll roads, bridges, rail systems, highway projects, water supply projects, water treatment systems, irrigation projects, sanitation and sewerage systems or solid waste management systems, ports, airports, inland waterways, inland ports, or navigational channels to the sea.
Tax incentives for exports
Export profit from a new undertaking, satisfying prescribed conditions and set up in an SEZ, is eligible for tax exemption of 100% for the first five years, from the year in which manufacturing commences, followed by a partial tax exemption of 50% for the next five years. A further tax exemption of 50% of the export profit for five years is also available after that, subject to an equal amount of profit being retained and transferred to a special reserve in the books of account.
Tax incentives for units in the North Eastern Region of India
Measures are in place to facilitate the development of the North Eastern Region of India and of the state of Sikkim. Undertakings located in these states that (i) begin to manufacture or produce any eligible article, (ii) undertake substantial expansion, or (iii) commence an eligible business between 1 April 2007 and 1 April 2017 are eligible for a 100% deduction of profits for ten consecutive years.
A list of eligible businesses has been provided by the Indian government. The eligible businesses include hotels (not below two-star category), adventure and leisure sports including ropeways, the provision of medical and health services in nursing homes with a minimum capacity of 25 beds, operating a vocational training institute for hotel management, catering and food crafts, entrepreneurship development, nursing and para-medical training, civil aviation related training, fashion design and industrial training, running an information technology-related training centre, manufacturing of information technology hardware, and bio-technology. Businesses other than the above-listed eligible businesses are not entitled to claim the tax holiday.
Tax incentives for hotels/convention centres located in specified districts
Hotels located in a specified district having a World Heritage Site, that are constructed and that have started functioning at any time during the period 1 April 2008 to 31 March 2013, are eligible for a tax holiday for a period of five years.
Tax incentives for certain income relating to offshore banking units and international financial services centres
A scheduled bank, or any bank incorporated by or under the laws of a country outside India, that has an offshore banking unit in an SEZ or an international financial services centre with a specified income that is subject to prescribed conditions is eligible for a tax exemption of 100% of the specified income for five consecutive years beginning from the year in which the permission under the Indian Banking Regulation Act, 1949 was obtained and of 50% of the specified income for five consecutive years.
To encourage the location of offshore fund managers in India, a specific regime has been laid down. In the case of an eligible investment fund, fund management activity carried out through an eligible fund manager acting on behalf of such fund will not constitute a business connection in India. An eligible investment fund will not be treated as resident in India merely because the eligible fund manager undertakes fund management activities in India. Offshore funds and fund managers are required to satisfy certain conditions to be eligible for the regime. The conditions are not applicable to funds set up by the government of a foreign state or the Central Bank of a foreign state, a sovereign fund, or such other funds as may be notified by the government of India and subject to fulfilment of conditions as may be specified. Further, the special regime shall be applied in accordance with guidelines and in such manner as the administrative board may prescribe.
Tax incentive for hiring new workmen
With a view to encouraging generation of employment, the benefit of deduction on hiring of new workmen has been extended to all taxpayers who are subjected to tax audit, instead of the earlier provision, which was applicable only to manufacturing units. Further, to enable smaller units to claim this deduction, the benefit has been extended to units employing 50 regular workmen.
To increase employment generation incentive to taxpayers across all sectors (who are subject to tax audit), where emoluments paid to an employee are less than or equal to INR 25,000 per month, the taxpayer will be eligible for deduction of 30% of additional wages paid to new regular workmen in a factory for a period of three years wherein the workmen are employed for not less than 240 days in a year. The benefits of this incentive would also be available in the first year of business, on emoluments paid to all employees. However, no deduction shall be allowed in respect of cost incurred on employees for whom the Government has paid the entire contribution under the Employees’ Pension Scheme, and for employees who do not participate in a recognised provident fund. This will be effective from tax year 2016/17 onwards.
Amortisation of cost of spectrum fee for Telecom operators
There was no clarity as to whether spectrum fees paid for by a telecom service provider would be covered within the scope of amortisation provisions, or would be eligible for depreciation claim at the rate of 25%, treating the spectrum fees as an intangible asset. The government has now clarified, by inserting a new provision, that it will allow amortisation of capital expenditure incurred and actually paid by the taxpayer for acquiring the right to use spectrum for telecommunication services, in equal instalments over the period of useful life of the spectrum licence. This will be effective from tax year 2016/17 onwards.
Patent Box Regime
In order to encourage companies to locate high-value jobs associated with the development, manufacture, and exploitation of patents in India, the government has introduced a concessional taxation regime for income from patents. Accordingly, income by way of royalty in respect of a patent developed and registered in India earned by an eligible taxpayer shall be subject to tax at the rate of 10% (plus surcharge and cess) on a gross basis.
An eligible taxpayer means a person resident in India, who is the true and first inventor of the invention, and whose name is entered on the patent register as the patentee.
This will be applicable from the tax year 2016/17.
Tax incentive of capital expenditure on certain specified businesses
Capital expenditure is allowed at 150%/100% up to 31 March 2017 in respect of the following specified businesses:
- Setting up and operating cold chain facilities.
- Setting up and operating warehousing facilities for storage of agriculture produce.
- Setting up and operating an inland container depot, freight station, or warehousing facility for storage of sugar, beekeeping, and honey and beeswax production.
- Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such a network.
- Building and operating a hotel of two-star or above category in India.
- Building and operating a hospital with at least 100 beds.
- Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the government.
- Developing and building specified housing projects under an affordable scheme of the central/state government.
- Investing in a new plant or newly installed capacity in an existing plant for production of fertiliser.
In case of certain specified businesses (commencing operations on or after 1 April 2012), such as cold chain facility, warehousing for agriculture produce, hospital with at least 100 beds, notified affordable housing projects and production of fertiliser, the deduction is 150% of the capital expenditure incurred on or after 1 April 2012.
The following characteristics and conditions may be noted:
- Any sum received or receivable in cash or in kind on transfer, etc. of the capital asset shall be considered as business income if expenditure on such an asset has been allowed as a deduction under this section.
- Any loss computed in respect of the above specified businesses shall be allowed to be offset or carried forward and offset only against the profits and gains of specified businesses.
- The specified business should:
- not be set up by splitting up or reconstruction of a business already in existence
- not be set up by transfer of used machinery or plant exceeding 20% of the total value of the machinery or plant used in such business, and
- have been approved by the prescribed authority (i.e. the government).
Besides the above, capital expenditure incurred on acquisition of asset (individual or aggregate) exceeding INR 10,000 per day shall be ignored for the purposes of computing the actual cost unless such payment was made
- by an account payee bank cheque/draft, or
- through the electronic clearing system through a bank account.
This will be effective from tax year 2018/19 onwards.
Research and development (R&D) expenditure
A weighted deduction of 200% and 175% of expenditure is available up to 31 March 2017 in respect of expenditure incurred on scientific research in an in-house R&D facility approved by the prescribed authority for companies engaged in specified businesses and in research associations, universities, etc., respectively. Such weighted deduction will be restricted to 150% of the expenditure from tax year 2017/18 to tax year 2019/20. Thereafter, deduction will be restricted to 100% of the expenditure.
A payment made to an approved research association undertaking research in the social sciences or in statistical research, or to an Indian company to be used by it for scientific research, is eligible for a weighted deduction of 125% of the payment made up to 31 March 2017. Such deduction will be restricted to 100% of the expenditure from tax year 2017/18 and onwards.
Contributions made to any National Laboratory, approved scientific research associations, universities, and the Indian Institute of Technology are eligible for a deduction of 200% of the contributions made up to 31 March 2017. Such weighted deduction will be restricted to 150% of the expenditure from tax year 2017/18 to tax year 2019/20. Thereafter, deduction will be restricted to 100% of the expenditure.
Foreign tax credit
See Foreign income in the Income determination section for a description of the foreign tax credit regime.