Corporate – Tax credits and incentives

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.

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 2022
• 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.

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 tax year 2020/21 onwards.

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, required to with-hold tax at the rate of 10% on income distributed to resident investor and at rates in force on income distributed to non-resident investor. 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 in the hands of BT if BT holds controlling interest and any specific percentage of shareholding or interest, as required under the applicable regulations. Further, dividends distributed to investors by REITs/InvITs are exempt in the hands of the unitholder if the SPV distributing such dividends to the REIT/InvIT does not opt for a lower corporate tax regime (i.e. the 22% tax rate exclusive of surcharge and cess).
Capital gains (e.g. on sale of shares of SPVs) (other than gains chargeable under relevant provisions of the Income-tax Act) are taxable in the hands of BTs at the maximum marginal rate. Any other income is taxable at the maximum marginal rate at BT level. 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 long-term capital gains (period of holding > 36 months) over and above of INR 0.1m on such sale of units shall be chargeable to tax at the rate of 10%. 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
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.
• Commercial production or refining of mineral oils.
• 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 project should be approved by an authority before 31 March 2008. The conditions are as follows:
• Size of residential unit should be minimum of one acre.
• Completion of project for claiming deduction will be increased from three years to five years from receipt of approval.
• Size restriction of 1,000 square metres for residential units shall apply only to metro cities (i.e. municipal limits of Chennai, Delhi, Kolkata, and Mumbai).

Tax incentives for development of affordable housing projects
A developer is eligible to claim 100% of deduction of the capital expenditure incurred wholly and exclusively for the purpose of development of project qualifying as affordable housing project as per specified criteria. However, the said deduction can be availed only on fulfilment of certain conditions. Some of the key conditions are:
• The developing company should not be formed by way of splitting-up or reconstruction of an existing business.
• The developer should invest in new plant and machinery only, provided up-to 20% of total plant and machinery can be previously used machinery.
• Deduction shall be allowed on all capital expenditure except for land, goodwill, and financial instruments.
• 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.
• Depreciation shall not be allowed if deduction is claimed under section 35AD.
• Deduction under sections 80-IA to 80RRB & 10AA shall not be allowed.

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); are eligible for a tax exemption of 100% of profits for any ten consecutive years falling within the first 15 years of operation. (Infrastructure projects except for ports, airports, inland waterways, water supply projects, and navigational channels to the sea shall be eligible for a tax exemption of 100% of profits for any ten consecutive years falling within the first 20 years of operation).
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.
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 is available with effect from 1 April 2017.
*’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. The said exemption is available on commencement of eligible business between 1 April 2006 and 31 March 2020.
The Government has further extended the above due date of 31 March 2020 to 30 June 2020, provided that the letter of approval is issued by the SEZ authorities on or before 31 March 2020.

Tax incentives for certain income relating to offshore banking units and international financial services centres (IFSCs)
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 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 thereafter.
A unit in an IFSC with a specified income that is subject to prescribed conditions is eligible for a tax exemption of 100% of the specified income for ten (at the option of the unit) out of fifteen years beginning from the year in which the permission under the Indian Banking Regulation Act, 1949 or permission/ registration under the Securities and Exchange Board of India Act, 1992 or any other relevant law was obtained.
Capital gains on transfer of capital assets being bonds, GDRs, derivatives, etc. undertaken on a recognised stock exchange located in any international financial services centre and where the consideration for such transfer is received or receivable in foreign currency will not be taxable. Further, the requirement of payment of STT shall not apply to transactions on stock exchange located in any international financial services centre. See the description of Capital gains in the Income determination section.

Safe harbour for offshore funds managed from India
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. Certain 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. Further, in respect of eligible investment fund and eligible fund manager located in an international financial services centre, the Central Government may relax one or more conditions in the future by way of a notification.

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 with no allowance of expenditure incurred on royalty income.
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.

Source:tax summaries