Expenses that are revenue in nature are, by and large, allowed as a deduction to businesses and professionals if they are:
- incurred wholly and exclusively for the purpose of the business or profession
- not in the nature of a personal expense, and
- not in the nature of a capital expense.
Depreciable assets are grouped in blocks, and each block is eligible for depreciation at a prescribed rate. The CBDT has issued a notification clarifying that with effect from 1 April 2017 the block of assets that are entitled to more than 40% depreciation shall now be restricted to 40%. However, by a notification dated 20 September 2019, a higher depreciation rate of 45% is allowed for certain assets under the 'plant and machinery' block on satisfaction of certain conditions. Hence, the depreciation rate available in case of different blocks of assets ranges from 0% to 45% as summarised below:
|Purely temporary erection (e.g. wooden structure)||40|
|Furniture and fittings||10|
|Plant and machinery||15 to 45|
Where the asset is used for less than 180 days in a tax year, the depreciation is restricted to 50% of the prescribed rate. If money receivable on the transfer of a depreciable asset exceeds the opening written-down value plus cost of acquisitions of assets falling within the block concerned, the excess is taxed as a short-term capital gain at the same tax rate as that applicable to business income.
Additional depreciation of 20% is allowed on the cost of new plant and machinery (other than ships or aircraft) acquired and installed to companies engaged in the business of manufacture of articles or things. This benefit is extended to power generating, transmission, or distributing business. Also, the benefit of initial depreciation to companies engaged in transmission of power is available. Power-generating or power-distributing companies have the option to either apply the reducing-balance method provided under the normal schedule or to charge depreciation on a straight-line basis. The straight-line rates are aligned with power companies’ book depreciation rates.
Where an expenditure is incurred for acquisition of a depreciable asset in respect of which a payment, other than by account payee cheque/draft or use of electronic clearing system through a bank account, exceeds INR 10,000, such payment shall not be eligible for normal/additional depreciation.
Know-how, patents, licences, franchises, and similar intangible assets can form part of a block of depreciable assets, provided they are owned and put to use in the course of their business and are eligible for depreciation at the prescribed rate, which is 25%.
Additional depreciation of 35% (as against the current rate of 20%) has been made available on new plant and machinery acquired and installed between 1 April 2015 and 31 March 2020, in the year of installation in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal. In line with the existing provisions, such incentive is not available to specified assets (e.g. office appliances, computer software).
Tax depreciation is not required to conform to book depreciation. However, an Accounting Standard mandates companies to reconcile both and provide for deferred tax assets, liabilities, expenses, and incomes.
An investment allowance benefit is allowed for companies engaged in the business of manufacture of articles or things. Taxpayers who have acquired and installed new plant and machinery (other than a ship or aircraft) on or after 1 April 2015 but before 1 April 2020 in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal can avail of an allowance of 15% of the actual cost of investment made in plant and machinery. Further, the acquisition of the plant and machinery can be made in any tax year.
In case installation of the new asset is in a year other than the year of acquisition, then the investment allowance shall be allowed in the year in which the new asset is actually installed. The assets have to be held for more than five years, and, if the asset is sold before this period, the investment benefit claimed will be reversed in the year of sale.
Investment in new plant and machinery will not include assets like plant or machinery used earlier in or outside India, any plant or machinery installed in any office premises or in residential accommodation (or guest house), any office appliances (including computers or computer software), vehicle, ship, or aircraft, the cost of which has been allowed as a deduction under any other provision.
Goodwill and commercial brand equity that are acquired in the course of amalgamation are intangible assets entitled to depreciation. The amalgamated/demerged company and the resulting company shall not be entitled to claim deduction for depreciation exceeding the amount calculated in any previous year. The deduction shall be apportioned between the amalgamating/demerging company and the amalgamated/demerged company in the ratio of the number of days for which the assets were used by them during any tax year. However, the issue of whether goodwill is eligible for tax depreciation or not is the subject of litigation, and there are divergent views of courts on this.
Certain expenses are incurred by taxpayers either before the start-up of a business or after start-up of a business, in connection with extension of the industrial undertaking, or in connection with setting-up a new unit. One-fifth of such expenditure is allowed as a deduction each year, over a period of five years.
Tax framework for start-ups in India
With a view to providing an impetus to start-ups and to facilitate their growth in the initial phase of their business, a deduction of 100% of the profits and gains derived by an eligible start-up from a business involving innovation development, improvement of products, processes, or services, or a scalable business model with a high potential of employment generation or wealth creation will be available.
The benefit of 100% deduction of the profits derived from such business shall be available for a period of three consecutive years out of ten years beginning from the year the start-up is incorporated.
Eligible start-up companies can carry forward losses and set off against income of a year if they satisfy either of the two conditions (i) at least 51% of beneficial shareholders in the year on incurrence of loss continue to hold shares in such start-up in the year of set-off, or (ii) the same shareholders in the year of incurrence of loss continue to hold their shares in such start-up in the year of set off (irrespective of their percent of holding). Further, only the losses incurred during the period of seven years beginning from the year in which such company was incorporated may be used for set off.
‘Eligible start-up’ means a company or an LLP engaged in the business mentioned above and which fulfils the following conditions, namely:
- it is incorporated on or after 1 April 2016 but before 1 April 2021
- the total turnover of its business does not exceed INR 1 billion in any tax year(s) prior to which the deduction was claimed, and
- it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.
Reduced rate of tax for newly set-up companies
To provide relief to newly set-up Indian companies, a beneficial CIT rate of 25% (plus applicable surcharge and health and education cess) has been announced with effect from tax year 2016/17. This beneficial rate is at the option of the company and is applicable on satisfaction of the following conditions, cumulatively:
- The company is registered and set up on or after 1 March 2016.
- The company is engaged in any business other than the business of manufacture or production of any article or thing and research or distribution of such article or thing manufactured or produced.
- The company has not claimed a benefit for establishing its unit in an SEZ, benefit of accelerated depreciation, or benefit of additional depreciation, investment allowances, expenditure on scientific research, and any deduction in respect of certain income.
- The company has not claimed set-off of loss carried forward from any earlier years following the tax years, provided such loss is attributable to the deductions referred to in (iii) above.
- The option of seeking the benefit of a reduced CIT rate of 25% is furnished in the prescribed manner before the due date of furnishing of income.
For companies other than Indian companies, the rate of CIT (plus applicable surcharge and education cess) shall remain unchanged.
Other reliefs to start-ups
Capital gain exemption to individual/HUF on investment in start-ups
Currently, the law, subject to certain conditions, provides for capital gains exemption to an individual/HUF on sale of a residential property (a house or a plot of land), provided that the net consideration received is invested for subscription of equity shares of eligible companies (including eligible start-ups) and such funds are utilised by the eligible companies for purchase of new assets.
Compliance with the notification of exemption
Currently, notified companies (start-up companies) are exempted from taxability of consideration received for issue of shares, in excess of the FMV of such shares, subject to fulfilment of certain specified conditions.
Now, the above provision is amended to provide that exemption will be withdrawn if the company fails to comply with any of the specified conditions and the income will be liable to tax in the year of such failure.
The above will be effective from 1 April 2020 and shall accordingly apply from assessment year 2020/21 onwards.
Any interest paid by a taxpayer on capital borrowed for the purposes of the taxpayer’s business or profession is tax-deductible without any limit. However, if such interest is paid to certain related persons (non-resident associated enterprise), then, the interest expense will be restricted to 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA). Excess interest expenditure disallowed in that year can be carried forward for eight years and would be available for set off. If the capital is borrowed for acquiring a capital asset, then interest liability pertaining to the period until the time the asset is put to use cannot be allowed as a tax-deductible expense and will have to be added to the cost of such asset. See Expenses allowable on actual payment basis below.
There are some specific guidelines for interest deduction being prescribed in ICDS.
The amount of any bad debt, or part thereof, that has been written off as irrecoverable in the accounts of the taxpayer for the year is allowed as a tax-deductible write-off. If any part of the sum written off is subsequently recovered, the recovered sum is taxable in the year of recovery.
Any charitable contribution made by a company to any charity is allowed as a tax-deductible expense, subject to certain conditions. The tax deductibility ranges from 50% to 100% of the charitable contribution, depending upon the nature of charity. However, no deduction shall be allowed in respect of contribution made in cash exceeding INR 2,000.
Where a Company has opted for reduced rate of tax of 22% under new tax regime, it will not be allowed to claim deductions of charitable contributions from FY 2020-21 onwards.
Expenditure incurred on corporate social responsibility (CSR) activities
Expenditure incurred by a taxpayer on CSR activities mandated under the Companies Act, 2013 is not allowed as a deduction for tax purposes under the Income-tax Act. However, if contributions are made to any charitable institutions, then deduction may be claimed from the total income subject to conditions. See charitable contributions above.
Expenses allowable on actual payment basis
Certain expenses, such as, but not limited to, employees’ provident fund dues (i.e. retirement benefit funds), bonus to employees, and interest payable to financial institutions and banks, are allowed as tax-deductible expenses only on actual payment. Tax disallowances are attracted if certain payments are delayed beyond their due dates under the respective laws.
Bribes, kickbacks, illegal payments
Expenditure incurred by a taxpayer that is illegal is deemed not to have been incurred for the purposes of the business or profession, and no deduction of such expenditure will be allowed.
Fines and penalties
Under the tax law, there are various procedural compliances (viz., audit of books of accounts, submission of tax returns, disclosure of particulars of income, etc.) that need to be complied with by taxpayers by the respective due dates prescribed therein. Non-compliance/delayed compliance of these procedures attract interest and penal consequences. There are prosecution provisions as well for certain offences. Penalties and fines paid for infraction of, or non-compliance with, any law are not deductible as business expenditure. Prosecution proceedings are criminal proceedings, and, in such proceedings, courts presume a culpable mental state on the taxpayer’s part. The burden of proving beyond all reasonable doubt (and not merely by preponderance of probability) the absence of such a state is on the taxpayer. Prosecution shall lie against companies that fail to file their return, whether or not tax is payable. Non-corporate taxpayers will be subject to prosecution proceedings in case of failure to furnish their return if the tax payable exceeds INR 10,000.
Further, a penalty of INR 10,000 on specified persons (i.e. accountants, registered valuers, or merchant valuers) for furnishing incorrect information in any report or certificate furnished by them under any provision of the Income-tax Act or the Income-tax Rules. The aforesaid penalty will not be imposable if there is reasonable cause for failure. Further, a new provision has been included to levy a penalty of INR 5,000 where the taxpayer has filed one’s return of income after the due date but on or before the 31st day of December of the tax year and INR 10,000 where the taxpayer has filed one’s return of income after the 31st day of December or has not filed one’s return of income. Failure to furnish statement of financial transaction or reportable account within the prescribed time is liable to pay a penalty of INR 500 for each day of continuing default. Further, INR 1,000 shall be charged for each day of continuing default in case of failure to furnish statement of financial transaction or reportable account within the period specified in the notice issued by the revenue authority.
All taxes (tax, duty, cess, or fees by whatever name called) relating to business (other than income tax) incurred during the tax year are usually deductible only in the year of payment.
Net operating losses
Losses can be carried forward and set off against income from subsequent year(s) for periods set out in the following table:
|Types of losses||Time limit|
|Business losses (other than speculation business losses)||8 years|
|Speculation business losses||4 years|
|Capital losses||8 years|
There are no provisions in India for carrying losses back to earlier years.
Payments to foreign affiliates
Indian companies can claim deduction for payments on account of royalties, and for interest and fees for technical or management service provided by foreign affiliates, as long as they are not capital in nature. Such payments are deductible in the year the requisite WHT is paid into the government treasury.