Tax Breaks and Other Incentives for Doing Business in India – India Briefing

There are various incentives 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.
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.
For tax incentives issued by individual states, the related state’s directorate of industries is usually the body in charge of granting benefits.
The Special Economic Zones (SEZs) policy was launched in April 2000. The Special Economic Zones Act, 2005 came into force June 23, 2005. The following year saw The SEZs Rules, 2006 come into effect on February 10, 2006. The salient features of the SEZ scheme are:
Incentives for SEZs to enhance exports from and promote FDI in, India include:
>> 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.
Tax incentives are granted to start-ups that are considered eligible under the government’s ‘Start-up India’ plan. New businesses should meet the following conditions to be eligible under this plan:
Here are some of the incentives and tax exemptions for eligible start-ups in India:
Deduction of capital expenditure is allowed at 100 percent in the year when the commercial operations begin in respect to the following specified businesses:
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 since 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 goal is to create local industrial capacity, attract FDI, and establish an ecosystem – impacting upstream and downstream investors and generating employment across skill categories.
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. Foreign investors and interested businesses should keep track of these PLI schemes as they are still being rolled out and modified or expanded based on sector needs and feedback.
The following sectors have been identified as intended beneficiaries of the PLI scheme with the government allocating budget outlay for the next five years:
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.
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.
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