Special Tax Incentives for Manufacturing in India

Overview

Manufacturing has emerged as one of the high growth sectors in India targeting global markets and are becoming formidable global competitors. India has jumped 30 places to reach the 100th spot in the World Bank’s “Doing Business Report 2017” and has been one of the top improvers. The country is expected to rank amongst the top three manufacturing destinations by 2020. Manufacturing sector is estimated to touch USD $1 Trillion by 2025 accounting for about 25 – 30% of the country’s GDP, creating up to 90 million jobs domestically. The Government of India has set up an ambitious plan of locally manufacturing around 181 products. This along with digital push could be a big catalyst to sectors such as power, oil & gas, automobile manufacturing.

In recent years, the Indian government has implemented a number of tax incentives for manufacturers. These incentives were created by the Make in India program and the Goods & Services Tax (GST), which are expected to increase the nation’s share of the global electronics manufacturing market.
The Make in India Program, established in 2014, provides
new incentives aimed at promoting investment, fostering innovation, and protecting intellectual property.
In 2017, India’s GST program was launched and it provides a uniform, transparent tax code. The goal of both programs is to create more jobs across the country and across many industries that have often been outsourced across the globe. India’s Manufacturing Tax Incentives

The tax incentives are designed to attract investors to the Indian manufacturing sector while increasing the job market and improving the Indian economy. They fall under several different categories, including tax holidays and credits, rebates, and investment allowances.
There are other tax incentives that vary based on industry, region, and other criteria.

Activity Incentives: These incentives are for any manufacturers and producers fulfilling certain conditions. They provide a 150% deduction on on-premises research and development, as well as funding the importation of any materials needed for these activities. Eligible manufacturers and producers also qualify for an exemption of customs duty.

Exportation Incentives: These incentives tend to offer rebates or waivers from charges and fees related to exportation and purchase of goods within a Special Economic Zone (SEZ). This includes exemptions of customs duty, VAT, excise duties, and Service Taxes. These incentives are incredibly attractive for exporters, as they can cut back significantly on their operation, transport, and sale costs and fees. These
incentives also offer to deduct 100% of a manufacturer’s export profits for the first 5 years of participation. This drops to 50% for the second 5 years and stays at 50% for another 5 if profits fulfil certain terms and conditions, including going to a special account for the purpose of buying manufacturing equipment.

Industry Tax Incentives: These tax incentives fall within specific industries that have unique or specific needs and requirements. The incentives supply tax deductions or direct reimbursement of many industry-incurred expenses, such as material storage and other necessities. They might also include the costs associated with running a hotel, developing a housing unit or sector, building a specialty transport system for
unique materials, or maintaining specialty storage units for sensitive food- and medical-grade materials. Eligible manufacturers in these industries will receive incentives in the form of tax deductions or repayment equalling 100% of the total fees associated with running their company.

Investment-based Incentives: In order to attract investment in specified sectors and to boost the exports, these incentives are offered on the investment made by the industries. The Government offers capex subsidy of 20-25% and grant-in-aid of 50- 75% of the total project cost for those companies meeting the criteria.

State-Based Incentives: These incentives can vary significantly from state to state. The states in north eastern India have a set of tax incentives for manufacturers. These vary based on the available industries, region size, investment potential, and the products produced in the region, among other considerations.
Incentives might be tied in to the land on which the manufacturing process takes place. These incentives might include waivers or permissions related to registration fees, stamp duties, property taxes, or more. If they’re related to the business infrastructure, they could include rebates or waivers on duties and tariffs related to utilities or subsidies on equipment related to manufacturing or clean air.

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); or laying and operating a cross-country natural gas distribution network are eligible for a tax exemption of 100% of profits for any ten consecutive years falling within the first 15 years of operation (first 20 years in the case of infrastructure projects, except for ports, airports, inland waterways, water supply projects, and navigational channels to the sea).

Tax Incentive Of Capital Expenditure On Certain Specified Businesses
Deduction of capital expenditure is allowed at 100% in the year when the commercial operations begin in respect of the following specified businesses:
Setting up and operating cold chain facilities.
Setting up and operating warehousing facilities for storage of agriculture produce.
Setting up and operating an inland container depot, freight station, or warehousing facility for storage of sugar, beekeeping, and honey and beeswax production.
Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such a network.
Building and operating a hotel of two-star or above category in India.
Building and operating a hospital with at least 100 beds.
Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the government.
Developing and building specified housing projects under an affordable scheme of the central/state government.
Investing in a new plant or newly installed capacity in an existing plant for production of fertiliser.

Conclusion
A clear strategy for securing incentives should be built into any investor’s game
plan. India offers many attractive tax benefits, we advise working with a professional
firms like us which is familiar with India’s regulatory environment. We can help
businesses identify all relevant tax breaks and incentives and draft a step- by-step guide
outlining the application process.

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