Tax incentives in India - EY - United States

1 Tax incentives in IndiaAugust 2014 For discussion purpose only1 Overview of tax incentives2 Location-based tax incentives3 Special zones incentives4 Activity-based incentives5 Industry-specific incentives6 Our value proposition7 Annexure8 GlossaryContentsOverview of taxincentivesOverview of tax incentives In order to attract new investments, develop infrastructure and promote export/ industries, India offersvarious incentives such as tax holidays, investment allowances, tax credits, rebates and so on Prior to expansion/ new investments, companies should evaluate and avail of available incentives toobtain tax synergies. Some of the incentives could be available to existing as well as new businessesTaxincentives Tax holiday in specified locations, viz., theNortheastern regions of India State-level incentivesLocation based Benefit for R&D expenditure Employment of new workmen SEZ developer Business of collecting and processing bio-degradable waste Project Import Scheme for initial set-up orsubstantial expansion of specified projectsExport linked Export from SEZ units Various indirect tax benefits/refunds, etcActivity based Infrastructure and power facilities Oil and gas Cold chain and warehousing Hospitals Fertilizer production Affordable housing project schemes Hospitality and tourism, etcIndustry specificLocation-basedincentivesSpecific incentives state levelGreenfield manufacturing projects, substantial expansion and diversificationLand related Stamp duty waiver/concessions Other concessions on registration charges, propertytaxes, conversion charges.

2 Etc Single-window clearanceInfrastructure Electricity duty exemption Rebates in tariffs for electricity/water/gas Subsidies on clean manufacturing technology, pollutioncontrol, etcCapital investment and employment VAT/CST-linked subsidies/soft loan/exemption Exemption or refund of entry taxes Subsidies linked to social security contributions (PF/ESI) Other subsidies (technology, transport, etc) Special incentive package for mega projectsBenefits depend on the sizeof eligible investment,location, employmentgeneration, nature ofproducts, etcCustomized incentives formega projectsorinvestment in backwardareas based on negotiationswith relevant stategovernmentsStates such asMaharashtra, Rajasthan,Tamil Nadu and WestBengal provide variousincentivesIncentives vary across States depending on their respective industrial policiesUndertaking/Manufacturing facility in northeast IndiaLocation Tax benefits are available forsetting up undertaking/manufacturing facilities( units )

3 In theNortheastern statesof India No area restrictions are applicable in these States , , the unit can be set up anywhere in thenotified regions The notified States are Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland,Sikkim and TripuraEligibility Manufactures or producers of any article or thing or carrying out any eligible business (such ashotels in the two-star category or above, bio-technology, manufacturing of information technologyhardware) The following products are not eligible for deduction in respect of direct tax incentives : Manufacturing activity must be initiated before1 April 2017 The key incentives are: Deduction of100% of profitsof the qualifying unit for 10consecutive years Deduction restricted to profits of the unit on a stand-alone basis Refund on excise duty payable on specified value addition for 10 consecutive years Tobacco and manufactured tobacco products Pan masala Plastic carry bags Goods produced by petroleum oil or gas refineriesSpecial zonesincentivesSEZ unit Must be engaged in the export of goods and services from 1 April2005 onward Must not be formed by splitting up or reconstructing an existingbusiness Not to be formed by transferring a previously owned plant andmachinery to the SEZ unitSEZ developers Should be involved in the development, operation andmaintenance of SEZs, including their infrastructure facilitiesConditionsBook profits subject to MAT.

4 Nevertheless, MAT credit available for10 years SEZ units eligible for a 15-year tax holiday (in a phased manner refer below table)Book profits subject to MAT; nevertheless, MAT credit is available for10 years Developers eligible for a 10-year tax holiday out of 15 years fromthe year in which the particular SEZ is notifiedTaxholidayDeductionformulafor SEZP rofits of SEZ unit x [export turnover of unit/total turnover of unit]Quantum of deduction for the SEZ unitPeriod of deduction100% of export profitsFirst 5 years50% of export profitsNext 5 years50% of export profits, provided that the profits aretransferred to a Special Economic Zone ReinvestmentReserve Account for the purpose of acquiring plant ormachinery within 3 yearsNext 5 yearsSEZ benefits (for the unit/developer) once expired cannot be renewed=Moreincentives for SEZ unitsCustoms duty Customs dutyexemptionon goods imported for authorizedoperations Customs duty not payable on goods exported by a unit to anyplace outside India (though customs duty is payable on a sale tothe DTA)

5 No specific approval/license required for importsExcise duty Excise dutyexemptionon all goods brought from the DTA into anSEZ Unit to carry out authorized operations Goods manufactured by an SEZ unit not liable to excise duty (butclearances are subject to customs duty)Value-added tax VAT exemption on the purchase of goods within the state in mostof the States Exemption from CST on the inter-state purchase of goods used forauthorized operationsService tax Upfront exemption from service tax for services received by theSEZ for authorized operations Other services not exclusively used for authorized operationseligible for service tax refund, subject to conditions Output services provided by SEZ zero rated if servicesqualify as export of service States grantadditional benefitssuch as stampduty exemption,VAT exemption/refund andelectricity dutyexemptionEOUE xemption/Refund of various indirect taxes such as customs duty, excise duty and CST on theprocurement of capital goods and inputs (as the case be)

6 For permitted operationsEPCGA llows duty-free procurement of capital goods by exporters, subject to the fulfilment of exportobligation and other specified conditionsAA/DFIAP ermit the import of inputs without customs duty, subject to the fulfilment of value-added normsand export obligationDuty drawbackPost export benefit to allows rebate of taxes and duty paid on inputs and input services used inthe manufacture of exported goods at prescribed ratesFPS/FMSPost export benefit allowed by way of duty credit scrip equivalent to a specified percentage ofthe FOB value of exports of specified products to any country/all products to notified countriesSFISA vailable to specified service providers having service exports of INR1 million or more forimport/procurement of spares, office equipment, furniture and consumablesPost export benefit allowed by way of duty credit scrip equivalent to 10% of the net foreignexchange earned in the current financial yearBenefitsSchemeIncentives forexportersActivity-basedincentivesWeig hted deduction for R&DApplications are reviewed in depth by the DSIR before granting approvalPermissible expenditure: capitalexpenditure incurred (except onland and building) up to 31 March2017 on in-house scientific R&Dfacility approved by the DSIRC ompanies engaged in themanufacturing or production of anyarticle or thing (other than as mentionedin Schedule 11 Refer Annexure 1)or in bio technology business200% deduction on in-house R&D Separate accounts to be maintained andaudited for each approved facility Progress report of R&D activities to besubmitted every year within the prescribedtimeKey compliancesEligibilityBenefit.

7 In-house R&D facilityeligible for deduction @ 200%under the ActRecentexperienceIncentives for R&DCustoms duty concession*The above parameters are only preliminary and genericResearchinstitutionAgro-chemicalR &DunitCompany having anin-house R&D unit Customs duty exemption Goods imported for R&D purpose Export turnover of INR 200 million in thepreceding FY An R&D wing registered with the DSIR Goods not to be sold or transferred for sevenyears from the date of installation Concessional rate of customs duty Specified instruments,equipment, consumables Importer to be a non-commercial researchinstitute Importer to be registered with the Government ofIndia in the DSIR Goods not to be sold or transferred for five yearsfrom the date of import Customs duty exemption Specified instruments, equipment, components, etc The project must be:a)undertaken by any company having an in-house R&D unit recognized by the DSIR under the Ministry of Science and Technology.

8 B)funded by the Government of India or related agencies (share of funding not to be less than 20%) Goods not to be sold or transferred for five years from the date of import Apart from the customs duty exemption for units registered with DSIR, a provision has been made for entities not registered with DSIR forpayment of customs duty at the time of import by public funded and other research institutions, and then claim refund of customs duty paid,subject to submission of a certificate of registration from DSIR and other specified conditionsSchemeIncentive/BenefitTowards import of-Parameters*Deduction equivalent to 30% of additional wages/salary (overand above expenditure on wages/salary) available for threeyears in respect of new workmen employed Factory[as definedunder the Factories Act,1948]of an Indiancompany Manufacturers of goodsin a factory Factories not formed byhiving off, transfer ofanother existing entityor as a result ofamalgamation withanother company Workers engaged inany manual, skilled ortechnical work Does not includecasual workmen, thoseemployed throughcontract labor oremployed for < 300days during a tax year.

9 Neither for employeesin a managerial/administrative capacityor in supervisorycapacity drawingsalary exceeding million per month Deduction only forundertakings employingmore than 100 workmenduring the year Deduction only for wagespaid to new workmen> 100 employees Additional condition deduction only if totalnumber of newemployees is at least10% more than theexisting workforce (andminimum of 100employees) Return to beaccompanied byparticulars certifiedby the tax auditor inthe prescribed formEmployment ofnew workmenBenefitsavailable toWorkmeninclude/excludeNumber ofworkmenReporting andcomplianceClaims on additional salary/wages could be considered for entry-level employeesInvestment allowance (Large Investments) Deduction for theacquisition and installation of newassetsby a company engaged in the manufacture orproduction of any article or thingafter 31 March 2013 butbefore 1 April 2015(specified period) Actual cost of new assets acquired/installedduring thespecified period to exceedINR 1,000 million Neutral to the description of the article Foreign currency fluctuation gains/losses to be factored Allowance independent of depreciation claim andcomputation of WDV New asset:plant and machinery excluding ships, aircraft,computers or computer software, vehicles, etc Assets depreciable @ 100% do not qualify for relief Tax holiday units eligible for investment-linked incentivewould not qualify for allowance There is no specific reference to intangible assets Non eligible assets do not enter the calculation of the 1000million mark Deduction @ 15%shall be as follows.

10 Period ofinvestmentQuantum ofdeduction(A) 1 April 2013to 31 March201415% of the actual costof the new assetacquired and installedduring the tax year2013-14, ifinvestment > INR 1,000million(B) 1 April 2014to 31 March201515% of the actual costof the new assetacquired and installedduring the period1 April 2013 to 31 March 2015, asreduced by deductionunder (A) above, ifaggregate investment >INR 1,000 millionInvestment allowance (Mid-Size Investments) Deduction for theacquisition and installation of newassetsby a company engaged in the manufacture orproduction of any article or thing on orafter 1 April 2014but before 1 April 2018(specified period) Actual cost of new assets acquired/installedduring thespecified period to exceedINR 250 million Neutral to the description of the article Foreign currency fluctuation gains/losses to be factored Allowance independent of depreciation claim andcomputation of WDV New asset:plant and machinery excluding ships, aircraft,computers or computer software, vehicles, etc Assets depreciable @ 100% do not qualify for relief Tax holiday units eligible for investment-linked incentivewould not qualify for allowance There is no specific reference to intangible assets Non eligible assets do not enter the calculation of the 250million mark Deduction @ 15%shall be as follows:Period ofinvestmentQuantum ofdeduction1 April 2014 to31 March 201715% of the actual costof the new assetacquired and installedin each tax year, if ineach tax yearinvestment > INR 250millionParametersAgriculture ExtensionSkill developmentQualifying expenditureAnyexpenditure on an agricultureextension project , asnotified by CBDTAny expenditure (except for cost of land and building)on skill development project.