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Tax Holiday is an initiative by the government that gives away a tax reduction or even exemption in certain cases. In India like developing countries it is used to attract foreign investment. When the government wishes to boost certain production of goods or a sector of industries it grants a scheme of tax holidays. However, the intention behind these tax holidays is always for a temporary period and not permanent.

An example of tax holiday is sales tax holiday wherein consumers do not pay any tax on a the listed product for a specific period of time, to relieve taxpayers and thereby simultaneously boosting that sector.

Therefore benefits of tax holidays are :

1) Increases Foreign Investment

2) Promotes Economic Activities

3) Inc Long Term Tax Revenue( Dec. Short Term).

Some examples of Tax Holiday under section 80IA comprise of following undertakings:

1. Provision of infrastructure facility :

Conditions Include :

i) Should provide infrastructure facility i.e. (road, highway project, water supply project, port, airport, navigational channel)

ii) It should be owned by an Indian Company

iii) There should be an agreement with the Central Government.

Commencement should be between 01 April 1995 to 01 April,2017.

100% of profits as deduction for 10 consecutive assessment years.

2. Telecom Services :

Conditions :

i) It should be a new undertaking(Cellular, Radio, Domestic Satellite Service, Broad-band Service and Internet service)

ii) It should not be formed by transfer of old plant and machinery

iii) The activity should commence between 31March 1995 and before March 31,2005.

They are entitled to 100% profit deduction for first five years and 30% for the next five years

3. Industrial Parks or SEZs :

Conditions :

i) It is develops/ed or maintains an industrial park of SEZ as per scheme framed and notified by Central Government.

ii) The Park must start operating from April 1,2006 and March 31,2011 under the Industrial Park Cheme,2008, and SEZ must start operation during April 1,1997 and march 31,2005.

100% profit deduction for consecutive 10 AY

Are Tax Holidays Beneficial In The Newer Tax Regime

4. Power Generation/distribution :

Conditions :

i) New Undertaking

ii) It is setup in any part of India for generation or generation and distribution of power

iii) Should not be formed by transfer of old plant and machinery (20% old machinery is permissible)

iv) Commencement B/w 01 April 1993 to 31 March,2017, transmission between 01 April,1999 to 31 March,2017.

100% profit deduction for 10 Consecutive AY

5. Reconstruction of a power unit :

Conditions :

i) It should be owned by an Indian company and set up for reconstruction or revival of power generating plant

ii) Formed b/w Nov 30,2005 with majority equity by public sector companies for the purpose of enforcing the security interest of the lender to the company owning power generating plant and such Indian company is notified before Dec 31,2005 by govt.

iii) Such undertaking should generate and distribute power before march 31,2011. 100% profit deduction for 10 consecutive AY

6. Laying and Operating Cross-Country Natural Gas Distribution Network :

Conditions :

i) The undertaking is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation established or constituted under central or state Act /

ii) The undertaking has been approved by the petroleum and natural gas regulatory board and notified by the central government.

iii) One-third of its total pipeline capacity is available for use on common carrier basis by any person other than assesee.

iv) Functions start on or after April 1,2007.

v)Should not be formed by reconstruction of old plant and machinery. 1000% profit deduction for 10 consecutive A.Y.

Now as effective corporate tax has been slashed to 25.17&% for domestic companies, and new provisions under income tax act allows any domestic company to pay income tax at the rate of 22% subject to the condition that they will not avail any deduction (For example: Tax Holidays).

Moreover, companies incorporated after October 1, pay income tax at 15% subject to no incentives. Now for a company using tax holidays can opt in the newer and lower tax regime by giving up foregoing and future tax holidays deduction or keep using their deductions and pay the higher corporate tax (old tax regime).

Hence it is beneficial now to opt out of these deductions, as it’ll be beneficial for the company as it pays lower tax and has greater savings, moreover tax holidays create a disparity for industries working in the same sector and not able to fulfill its conditions, hence removing tax holidays will be beneficial for competitiveness of the market and economy as a whole.

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May 2024