Understanding India’s Industry-Specific Tax Incentives

DELHI – Last month, India signed a Memorandum of Understanding (MoU) with the U.S. that will pave the way for an influx of investment into various infrastructure projects. While the focus of that story is necessarily on overall U.S. – India bilateral trade and the effect that the MoU will have on India’s still-developing infrastructure, the deal also underscores how much more receptive the Indian government can be towards foreign investment in certain sectors.
 
India’s infrastructure sector is just one of several that offers attractive tax deductions to foreign investors. Incentives also exist in numerous other industries where the Indian government deems foreign investment to be in the interest of the country, which in turn allows for lower operational costs for companies working in those sectors. In this article, we highlight which industries offer tax incentives and outline how foreign businesses can qualify for tax deductions.
 
Infrastructure Sector
 
The deduction of 100 percent of business profits is permitted for a period of 10 years for:
 
 - The development, operation, or maintenance of ports, airports, roads, highways, bridges, rail systems, inland water ways, inland or outland ports or navigational channels, water supply projects, water treatment systems, irrigation projects, sanitation and sewage projects, and solid waste management systems;
 - The generation and distribution of power commencing before March 31, 2010;
 - Laying and operating a cross-country natural gas distribution network.
 
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Mineral Oil
 
The deduction of 100 percent of business profits is permitted for the refining of mineral oil for a period of 10 years for:
 
 - An undertaking wholly owned by a public sector company or any other company in which a public sector company holds 49 percent of voting rights;
 - An undertaking that commenced refining on or before March 31, 2012.
 
Hospitals
 
The deduction of 100 percent of profits from businesses operating and maintaining a hospital for a period of 5 years for:
 
 - Hospitals that were constructed or began functioning any time between April 1, 2008 and March 31, 2013;
 - Hospitals with at least one hundred beds for patients.
 
Hotels and Convention Centers
 
The deduction of 100 percent of profits from the business of hotels and convention centers for a period of 5 years for:
 
 - Hotels and convention centers located in the National Capital Territory of Delhi;
 - Hotels that were constructed or began functioning any time between April 1, 2007 and March 31, 2010. Likewise, for convention centers constructed between April 1, 2007 and March 31, 2010;
 - Hotels located in a World Heritage site district. Hotels that meet this qualification must have been constructed or began functioning between April 1, 2008 and March 31, 2013.
 
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Undertakings in India’s Northeastern States
 
The deduction of 100 percent of business profits for a period of 10 years for:
 
 - Manufacturing, producing goods, or undergoing substantial expansion between April 1, 2007 and March 31, 2017 and providing eligible services between April 1, 2007 and March 31, 2017;
 - Eligible services are hotels (2 stars and above), nursing homes (25 beds or more), old age homes, vocational training institutes for hotel management, catering and food crafts, entrepreneurship development, nursing and paramedical, civil aviation related training, fashion design and industrial training, IT related training centers, IT hardware manufacturing units, and bio-technology.
 
However, there are some special stipulations, including:
 
 - Deduction is not available in respect to the manufacture or production of tobacco, pan masala, plastic carry bags of less than 20 microns, or goods produced by petroleum and gas refineries;
 - The aforementioned activities must take place in a Northeastern State (i.e. Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, and Tripura).
 
Tax Exemptions
 
The following tax exemptions are available in different sectors, and allow for deductions of 100 percent profits for:
 
 - The development, operation, and maintenance of an industrial park or Special Economic Zone (SEZ). For full details of India’s SEZs, see our article here.
 - Undertakings in certain notified areas or in certain thrust sector industries in the Northeastern states and Sikkim.
 - Undertakings set up in certain notified areas or in certain thrust sector industries in Uttaranchal and Himachal Pradesh.
 - The export of articles or software by undertakings in FTZs, electronic and hardware technology parks, and software technology parks. - The export of articles or software by 100 percent export oriented units.
 - Undertakings engaged in the integrated business of handling, storing, and transporting food grains.
 - Undertakings engaged in the commercial production or refining of mineral oil.
 - Undertakings from the export of wood based handicrafts.
 
This article was first published on India Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
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