How Tax Credits and Incentives Work on Indian Corporates?

Tax incentives act as a boon for Indian corporates
Tax Credits - Indian Corporates - government - TAXSCAN

An incentive is a powerful tool that is used to influence certain desired behaviours or actions often adopted by governments and businesses. The implication of incentives can be powerful tools often employed to increase effort and higher performance according to the “law of behaviour.”

India offers tax incentives at both the central and state levels for investors in specific sectors, while India’s special economic zones (SEZs) offer comprehensive tax relief. Section 2(17) of the Income Tax Act, 1961, defines a corporation as a company incorporated in India or outside India (under the laws of that foreign country). The definition also includes institutions, associations and bodies of individuals that have been assessed as a corporation for any assessment years after 1922. Apart from these Central Board of Direct Taxes ( CBDT ) can declare an institution, association or body of individuals to be taxed as a corporation. However, this declaration is applicable only for the assessment year in which it is made.

A corporation can be defined as a legal entity independent from its shareholders that is entitled to certain rights and functions/duties of its own. In India, corporations can be divided into two categories; A Domestic Corporations is any company whose management and control are entirely situated in India and is registered under the Indian Companies Acts of 1956 or 2013 is referred to as a domestic corporation.

A foreign corporation is a company that is based outside India or has a portion of its operations controlled and managed outside the nation’s borders is referred to as a foreign corporation.

The tax credit and tax incentives can help attract investments.

Start-ups and Tax Benefits

To provide 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 was allowed. A 100 per cent deduction of capital expenditure is allowed in the year when the commercial operations begin. This deduction was available for three consecutive years out of ten years beginning from the year the start-up was incorporated.

Eligible start-up companies means a company or an LLP incorporated on or after 1 April 2016 but before 1 April 2024, the total turnover of its business does not exceed INR 1 billion in any tax year(s) before 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. The corporate income tax rate for new companies is 22 per cent rate and for new domestic manufacturing is 15 per cent. The concessional tax regime (22 per cent) for domestic enterprises is applicable only if they do not avail of specific tax incentives or deductions. (The effective tax rate for these domestic companies is around 25.17 per cent inclusive of surcharge and cess.)

Tax Incentives on Specified Business

The tax deduction is allowable for corporates engaged in the specified business. Usually, the tax holiday periods range from five to ten years, and the percentage of the rebate is 30%, 50%, or 100% in the initial years and 30% in the later years. If certain conditions are met, a tax deduction 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.
  • Commercial production or refining of mineral oils.
  • Processing, preservation, and packaging of fruits or vegetables.
  • Operating and maintaining a hospital in a rural area.

Export Tax incentives

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. The said exemption is available on commencement of eligible business between 1 April 2006 and 31 March 2020.

Incentives for Special Economic Zones (SEZs)

A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country’s national borders. Their aims include increased trade balance, employment, increased investment, job creation and effective administration. SEZs offer several incentives to foreign investors to ease doing business.

The incentives such as tax benefits, and favourable policies make it easier for them to invest in India. SEZ developers and units are eligible for tax exemptions on their profits and investments for a specific period, varying with the type of SEZ and the approval date. The SEZ units are entitled to a 100 per cent Tax exemption on their profit for the first five years, followed by 50 per cent for the next five years.

With proper planning and strategies, corporates can maximize tax benefits and incentives, leading to substantial cost savings and increasing investment growth.

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