Profit linked incentives for specified industries vis-a-vis investment-linked incentives – Section 35AD


Section 35AD of the Act extends investment linked incentives to taxpayers with respect to the capital expenditure incurred for setting up and operation of specified businesses. Further, once investment linked incentive for the capital expenditure is availed under this Section, no benefit shall be allowed in respect of such specified business under Chapter VIA (Deductions in respect of certain incomes) and Section 10AA of the Act.

The Finance Act, 2016 has amended section 35AD of the Act so as to reduce the deduction from 150 per cent to 100 per cent in the case of a cold chain facility, warehousing facility for storage of agricultural produce, an affordable housing project, production of fertilizer and building and operating hospitals with effect from 1 April 2017.

Deduction under Section 35AD of the Act is an alternate form of accelerated deduction for the capital expenditure in the specified business. However, the cash flows of these capital intensive industries suffer on account of levy of MAT. This is because book profits continue to be higher than taxable profits (given that deduction for capital expenditure is not taken to the profit and loss account other than in the form of depreciation) and hence, MAT is paid by the industry during the incentive period. While MAT is creditable against normal taxes in future, the period for recovery of MAT paid could result in being longer than under profit linked incentives. Further, given the restriction on the years for carry forward of MAT, it is possible that MAT paid in initial years may not be recovered, especially for those taxpayers who have a longer period before reaching break-even.


The profit-linked incentives currently available for infrastructure and crucial sectors should not only be expanded but also continued till the end of the next Five Year Plan to encourage investment and growth of India’s infrastructure sector.

With the governments ‘Make in India’ campaign, there would be a need to bring under the ambit of deduction of Section 35AD of the Act more sectors to further strengthen the industrial base of the country, for e.g. the steel industry being a high capital intensive industry, capital expenditure should be allowed as a deduction on the amount of expenditure incurred.

It should be considered further reduce the rate of MAT more so for the infrastructure sector as levy of the same defeats the very purpose of extending tax incentives to the industry, especially given the high rate of MAT now.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)
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June 2021