Tax incentives are available to businesses in India depending on the economic activity, industry, location, and size of the firm.
Investors become eligible for most of India’s tax breaks and incentives after registering with the Ministry of Corporate Affairs. Tax incentives tied to specific targets – such as hiring over 50 Indian employees – often require additional permissions from related ministries.
India offers tax relief at both the central and state level. Further, additional incentives are available to investors in specific sectors, while India’s special economic zones (SEZs) offer their own comprehensive tax relief. However, not all tax benefits offered in India are mutually inclusive.
[tips title="Important Tip"]Availing the benefits of one incentive may disqualify investors from applying to others. Businesses entering the Indian market should review the country’s tax incentives carefully and ensure their entry plan provides them with the greatest tax relief possible.[/tips]
For tax incentives issued by individual states, the related state’s directorate of industries is usually the body in charge of granting benefits.
Incentives for Special Economic Zones (SEZs)
Incentives for SEZs to enhance exports from and promote FDI in, India include:
- Relaxation of payment of customs and excise on imports from domestic sources.
- Tax holiday for SEZ developers.
- Tax exemption for offshore banking units in SEZ.
- Exemption from minimum alternate tax.
- Exemption from capital gains tax – the exemption is available, if within one year before or three years after such transfer:
- Machinery or plant is purchased for the purposes of business of industrial undertaking in SEZ by the assessee.
- The assessee has acquired land or building or has constructed building for the purposes of business in SEZ.
- The original assets are shifted, and establishment of the industrial undertaking is transferred to SEZ, and other specified expenses have been incurred.
- The amount of exemption for capital gains is restricted to the costs and expenses incurred in relation to all or any of the purposes mentioned above.
Conditions for SEZ developers
- To avail incentives, the firm must be involved in the development, operation, and maintenance of SEZs, including their infrastructure facilities
- Must be engaged in the export of goods and services from April 1, 2005 onward
- Must not be formed by splitting up or reconstructing an existing business
- Not to be formed by transferring a previously owned plant and machinery to the SEZ unit
Incentives for Startups
Tax incentives are granted to startups that are considered eligible under the government’s ‘Startup India’ plan. Currently, 30 of the 36 Indian States and Union Territories have a dedicated Start-up Policy. India has 66,336 recognized start-ups as of March 2022.
New businesses should meet the following conditions in order to be eligible under this plan:
- A company that has been incorporated for less than seven years qualifies as a startup. For a company operating in the biotechnology sector, this time period is 10 years.
- The annual turnover of the company should not be more than INR 1 billion.
- The company should aim towards development, innovation, deployment, or commercialization of any new products, services, or processes that are either driven by technology or intellectual property.
- The company cannot be created by splitting up or restructuring an existing company.
- The company has to get its certification from the Inter-Ministerial Board setup.
- The company can be registered either as an LLP, registered partnership or a private limited company.
Here are some of the incentives and tax exemptions for the eligible startup in India:
- Any startup that has been incorporated after April 1, 2016 can get a 100 percent tax rebate on its profits for a total period of three years within a block of ten years. However, if the company’s annual turnover exceeds INR 1 billion, then the tax rebate is not valid.
- These startups are exempt from long-term capital gains tax. However, this is only applicable if the capital gains that have been invested are a part of the fund notified by the central government within a total period of six months from the date of the actual transfer of the asset.
- If an eligible startup makes an investment, the government will exempt the tax on the investment above the fair market value. This includes a range of different investments, such as funding secured by resident angel investors, and funds that are not registered as venture capital ones. Additionally, investments that are made by incubators above the fair market value are also exempt under this plan.
- India now allows startups to convert debt investments made into company equity shares for up to 10 years to ease pressures from the COVID-19 pandemic on entrepreneurs. Previously, the option to change convertible notes into equity shares was allowed up to five years from the date of issuance of the initial controvertible note. Convertible notes are among the popular financing instruments for early-stage funding of startups.
Tax Incentive of Capital Expenditure on Certain Specified Businesses
Deduction of capital expenditure is allowed at 100 percent in the year when the commercial operations begin in respect to 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 fertilizer
Tax Incentives to Boost Manufacturing Sector
India wants to expand the contribution of its manufacturing sector to the GDP, from 17 percent to 25 percent. To address this, the government rolled-out targeted production-linked incentive (PLI) schemes late last year to select beneficiaries in specific sectors.
Although only a handful of applicants will benefit from PLI incentives in each sector, a mix of local and foreign firms, the ultimate goal is to create local industrial capacity, attract FDI, and establish an ecosystem – impacting upstream and downstream investors and generating employment across skill categories.
[tips title="Important Tip"]Foreign investors may want to inject capital into or establish business relationships with companies that have access to PLI incentives, which will be disbursed based on incremental sales of products manufactured in India and the budget outlay for the respective sectors.[/tips]
The following sectors have been identified as intended beneficiaries of the PLI scheme with the government allocating budget outlay for the next five years:
- Pharmaceutical sector – the scheme will last for a duration of nine years from 2020-21 to 2028-29 for the purpose of creating a wide range of affordable medicines for local consumers and to move up the global supply chain of medicines. Assigned a budget outlay of US$2.04 billion.
- Medical devices sector – to create local domestic manufacturing capacity and promote medical device parks, the PLI scheme’s target segments include manufacturing radiology and imaging medical devices, anesthetics, and cardio-respiratory medical devices, etc. Assigned an outlay of about US$472 million.
- IT sector – to support the goal of becoming a global supplier of information technology (IT) hardware, the government will provide the sector with an incentive on net incremental sales of goods manufactured during a four-year period. Assigned an outlay of about US$1 billion.
- Advance chemistry cell (ACC) battery sector – will be reportedly aided in incentivizing large domestic and global companies to contribute towards making the sector more competitive within India itself. Assigned outlay of US$2.46 million.
- Automobiles and auto components sector – will be reportedly aided in becoming more globally competitive. Assigned outlay of US$7.7 billion.
- Telecom and networking products sector – will be reportedly aided in attracting large foreign investments that will help domestic companies emerge in the global export market. Assigned outlay of US$1.6 billion.
- Technical textiles and textile products in the man-made fiber (MMF) segment – will be aided in attracting large investments to boost domestic manufacturing. Assigned outlay of US$1.4 billion.
- Solar photo-voltaic (PV) modules sector – will be aided in incentivizing domestic and global companies to build the capacity for large-scale solar PV module manufacturing and then assimilate into its global supply chain. Assigned outlay of US$613 million.
- Specialty steel sector – will be aided in enhancing the manufacturing of value-added steel that will be then expected to raise its total exports. Assigned outlay of US$861 million.
- Food products sector – will be aided in identifying the specific food products whose production will be able to bring in medium-to-large-scale employment (refers to employing between 50-250 persons). Assigned outlay of US$1.48 billion.
Incentives for electronic manufacturing in India
In 2020, India approved three key schemes in a bid to boost domestic manufacturing as well as to attract investment and incentivize electronics and components manufacturing and exports in India. The government’s rationale here is that the schemes will enable the growth of original equipment manufacturing (OEM) players in the electronics manufacturing industry, which will further attract large-scale companies when they assess locations to locate new operations.
Scheme for Promotion of Manufacturing of Electric Components and Semi-Conductors (SPECS) in India: Launched in April 2020 that will reimburse 25 percent of capital expenditure to units investing in electric components manufacturing. Capital expenditure covers plant, machinery, equipment, associated utilities, technology, R&D. 20 product categories will benefit with minimum investment required between approx. US$700,000 to US$140 million. To avail the incentive, applications can be submitted till March 31, 2023 by an entity registered in India. The government will make the benefit available for a period of five years from the date of acknowledgment of the application. Beneficiaries must accept a lock-in period for commercial production.
PLI for Large Scale Electronics Manufacturing in India: Launched in April 2020 that provides incentive of four to six percent on incremental sales (over base year FY 2019-20) of goods manufactured in India for a period of five years. The eligible companies will belong to target segments, such as mobile phone and specified electronic components manufacturing. This also covers assembly, testing, marking, and packaging (ATMP) units.
Modified Electronics Manufacturing Clusters Scheme (EMC 2.0): This scheme aims to facilitate the creation of infrastructure and amenities required to attract major global manufacturers and their supply chains to establish their production base in India. Financial assistance of 50 percent of the project cost will be disbursed to qualified EMC projects, with a ceiling of approx. US$9.66 million for every 100 acres of land.
Tax Incentives in Different Indian States
Given that India has a federal government, foreign companies choosing where to set up in any of India’s states should note that each region has its own set of policies and incentive schemes. The applicability of incentives usually varies on the basis of the state’s location, the products that will be manufactured, the scale of investment, and the creation of jobs.
Incentives for capital investment could include reimbursement in the form of subsidies (capital and interest subsidy, land rebate). Incentives to relieve burden on expenditure incurred could include exemptions on government payments for electricity duty, stamp duty, and external development charges as well as reimbursement in the form of employment generation subsidies. Finally, states may also provide GST subsidy on sales made through GST refund and/or investment promotion subsidy.