TA X C O N SID ER A TIO N IN SETTIN G U P A N EW While setting up a new business, one has to consider the location of the business and the nature of the business. A number of factors have to be taken into consideration in deciding about the location and nature of the business. Tax Holidays and Deductions under Incometax are the main tax planning tools which are considered while setting up a new business. Tax factor also plays an important role in taking such decision. A tax holiday is a temporary reduction or elimination of a tax. Governments usually create tax holidays as incentives for business investment. The taxes that are most commonly reduced by national and local governments are sales taxes. In developing countries, governments sometimes reduce or eliminate corporate taxes for the purpose of attracting Foreign Direct Investment or stimulating growth in selected industries. Tax holiday is given in respect of particular activities, and sometimes also only in particular areas with a view to develop that area of business
LOCATION OF THE NEW BUSINESS The tax incentives which are available with regard to the location of the business are as follows: Tax Holiday for New Industrial Units situated in Free Trade Zone (Sec. 10A). 100% of the profits, derived from industrial undertaking, are allowed to be deducted in computing its taxable income. Tax holiday period is available up to accounting year 2009-2010. From the assessment year 2003-2004 an industrial undertaking set up in Special Economic Zone is entitled to claim 100% deduction in respect of its profit for the first 5 years and 50% for the next 2 years. 50%
deduction is further continued for 3 years, provided so much of the amount as does not exceed 50% of its profits is debited to profit and loss account and credited to "Special Economic Zone Re-investment Allowance Reserve Account" to be used within 3 years for specified purposes. From the AY 2006-2007, tax holiday for profits derived from the export of articles or things manufactured in units set up in Special Economic Zone is available for 15 years, 100% during the first 5 years, 50% during the next consecutive 5 years and during the last 5 years, such percentage profit, not exceeding 50% as is transferred to Special Economic Zone Re-investment A/c to be utilised for purchasing machinery and plant during the immediately succeeding period to 3 years [Sec. 10AAJ.] Profits derived from Operating Industrial Park or Special Economic Zone [Sec. 80-IA)]. Any undertaking deriving profits from operating or maintaining Industrial Parks or Special Economic Zone is allowed 100% deduction in respect of its profit for 10 assessment years subject to certain conditions. Profits from Industrial Undertaking located in the State of Jammu and Kashmir. 100% deduction is allowed in respect of profits derived from industrial undertaking located in Jammu and Kashmir for the first 5 years and thereafter for the next 5 years @ 30% for company assessee and 25% for non-company assessee. Tax holiday period for setting up new industrial undertaking has been extended up to 31 March 2012. Profits from certain Undertakings or Enterprises in certain Special Category States [Sec. 80-IC]. 100% deduction is allowed in respect of profits derived from certain undertakings or enterprises set up by the end of March 2012 in certain special category States for 10 assessment years. Profits and Gains from Business of Hotels and Convention Centres.
100% is allowed for 5 consecutive assessment years for the profits from the business of hotels and convention centres, set up during the financial year 2007-2008 to 2009-2010 in the National Capital Territory of Delhi, districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad. Profits and Gains from certain Undertakings in North-Eastern States [Sec. 80-IE]. 100% deduction is allowed for 10 consecutive assessments for the profits from undertakings set up in North-Eastern States during the financial year 2007-2008 to 2016-2017.
NATURE OF THE BUSINESS THE FOLLOWING TAX INCENTIVES ARE AVAILABLE WITH REGARD TO THE NATURE OF THE BUSINESS: Agricultural Income [Sec. 10(1)]. Agriculture is also treated as a business activity. Agricultural income is fully exempt from tax [under Sec. 2(1A)], though it is partially integrated with non-agricultural income to determine the rate of tax applicable to non-agricultural income. Dividends and Long-term Capital Gains accruing to Venture Capital Fund or a Venture Company [Sec. 10(23FB)]. Any income of a venture capital company or venture capital funds set up to raise funds for investment in a venture capital undertaking is exempt from tax. Tax holiday for 100% Export-oriented Undertaking (Sec. 10B). 100% of the profits derived from 100% export-oriented undertaking is deducted in computing its taxable income. Tax holiday period is available only up to the assessment year 2009-2010. [Sec. 10B w.e.f. AY 2001-2002 and onward].
Tax holiday for Industrial Units situated in Free Trade Zone (Sec. 10A). 100% of the profits derived from such industrial undertaking is deducted in computing its taxable income. Tax holiday period is available up to the assessment year 2009-2010. Tea Development Account (Sec. 33AB). Where a person is engaged in growing and manufacturing tea in India and he has made a deposit within specified time-limit with prescribed institutions he is allowed the following deduction in computing business income: (a) deposit made; or (b) 40% of profits from such business, without allowing deduction under this Section, Whichever is less, is allowed to be deducted. Profits from Prospecting Certain Minerals (Sec. 35E). Where an assessee is engaged in locating, proving and prospecting mineral deposits, listed in the Seventh Schedule, revenue expenditure incurred in this connection in the year of commercial production and four years prior to this, is allowed to be deducted over 10 previous years. Amortization of Telecom Licence Fees [Sec. 35ABB]. Every assessee is entitled to claim deduction in respect of capital expenditure incurred for acquiring the licence to operate telecommunication services. The deduction is allowed over the relevant previous years, beginning with the previous year in which the licence fee is actually paid and ending with the previous year in which the licence period is over. Special Reserve created by Financial Corporation [Sec. 36(1)(viii)]. Where any reserve is created and maintained by a specified entity for specified objects, it is entitled to deduction either for reserve so created; or (ii) 20% of the profits derived from such long-term finance, whichever is less.
Business of Civil Construction (Sec. 44AD). Where the receipts from the business of civil construction does not exceed Rs 40 lakh, the taxable income from such business is computed on deeming basis — 8% of the receipts from such business. The assessee is not required to maintain any accounts. Business of Plying, Hiring or Leasing of Goods Carriage [Sec. 44AE]. Where an assessee is engaged in the business of plying, hiring or leasing of goods carriage and he does not possess more than 10 trucks, taxable profits from goods carriage will be computed on deeming basis — i.e. (i) Rs 3,500 per month or part thereof for each heavy truck; and (ii) Rs 3,150 per month or part thereof for any other truck. The assessee is not required to maintain books of accounts. It is operative from the assessment year 2003-2004 and subsequent years. Income of Retail Business [Sec. 44AF]. Where an assessee is engaged in the business of retail trading of goods or merchandise and the gross receipts from such business does not exceed Rs 40 lakh, his income is computed on deeming basis—5% of the total turnover. He is not required to maintain the books of accounts. Profits from Industrial Undertakings or Enterprises engaged in Infrastructure Development [Sec. 80-1A(1) 100% deduction is allowed in respect of profits from infrastructure facilities, started on or after 1 April 1995 for 10 consecutive assessments year out of 15 years in which facility starts operating [Sec. 80-1 A(l)]. Profits derived from Generation/Distribution of Power [Sec. 80IA(4)] 100% deduction is allowed for profits derived from the business of generation or distribution of power or substantial renovation and modernisation of the existing network of transmission or distribution lines for 10 assessment years for undertakings, set up to 31 March 2010.
Profits from the Business of Processing, Preservation and Packaging of Fruits or Vegetables or from Integrated Business of Handling, Storage and Transportation of Food Grains [Sec. 80-IB(llA)]. 100% of such profits are allowed to be deducted for first 5 assessment years and thereafter a company-assessee is allowed 30% of such profits and a non-company assessee 25% of such profits for next 5 assessment years, subject to the conditions on this behalf. Profits from Operating Cross-country Natural Gas Distribution Network [Sec. 80-IA(4)(vi) r.w. Sec. 80-IA(l)(2)]. 100% deduction is allowed for 10 consecutive assessment years out of 15 years for undertakings set up on or after 1 April 2007 for the profits from operating cross-country natural gas distribution system. Profits from an Undertaking/Enterprise engaged in Development of Special Economic Zone [Sec. 80-1AB]. An undertaking/ enterprise, engaged in the business of developing Special Economic Zone, is allowed 100% deduction from such business for 10 consecutive assessment years out of 15 years, beginning from the year in which Special Economic Zone has been notified. Profits from Business of Collecting and Processing of Biodegradable Waste (Sec. 80-JJA]. Where an assessee is engaged in the business of collecting and processing or treating of bio-degradable waste for generating power or producing bio-fertilizers, bio-pesticides or other biological agents or for producing bio-gas or making pellets or briquettes for fuel or organic manure, the whole of profits from such business is deducted in computing business income. Tax holiday is allowed for five assessment years. It is operative from the assessment year 2000-2001.
