Introduction: Understanding tax obligations is crucial for individuals and businesses alike. One intriguing aspect of tax regulations is the concept of tax holidays. In this comprehensive guide, we explore the definition, workings, benefits, and key sections related to tax holidays, shedding light on their significance in fostering economic growth.
As everyone is aware, the first thought that crosses someone’s mind when they receive any kind of income is what will become their tax liability for the following income. Different sources of income can be generated through different sources, and all income otherwise declared as exempt from taxation is subject to taxation.
The government occasionally offers tax breaks to various business categories in an effort to encourage more people to launch their own companies and generate jobs in the process. The tax breaks that the government offers to various business categories are occasionally referred to as “Tax holidays.”
In India, it is used to attract foreign investment and boost certain production of goods or a sector of industries. It is a temporary period when the government reduces or provides complete relaxation on tax payable on a specific range of products, income or property.
We can better understand tax holidays by reading the following FAQs.
Page Contents
What is Tax holiday?
A tax holiday is a set time frame where certain taxes are either completely or temporarily waived. Governments frequently use this tactical fiscal action to support specific economic sectors, promote growth, and draw in investment. Although the word “holiday” conjures images of leisure, in terms of money, it denotes release from some tax obligations.
How does tax holidays work?
Tax holidays serve the purpose of giving people and companies a brief reprieve from paying certain taxes. Taxes that fall under this category could include corporate taxes, income taxes, or specific profit-sharing charges. Tax holidays can be imposed by governments at the national, regional, or sectoral levels, and they can tailor the incentives to meet particular economic objectives.
What are the benefits of tax holidays?
- Increases foreign investment
- Promotes economic activities
- Long-term tax revenue is increased (though short-term revenue may be reduced). A tax holiday is a temporary reduction or elimination of taxes for consumers or businesses. A tax holiday is intended to boost economic activity and growth. Businesses may also be given tax breaks as an incentive to invest.
Why there is a contradiction between tax holiday and exemption?
- A tax holiday is an initiative of the Indian government that provides reduced taxation as well as exemption in certain circumstances.
- A tax exemption, on the other hand, is a provision that allows a certain amount of income or investments to be exempt from taxation. Its purpose is to lower the tax burden on individuals and businesses.
- While both tax holidays and exemptions aim to reduce the tax burden, their scope and duration differ. Tax exemptions are permanent and apply to specific types of income or investments, whereas tax holidays are temporary and granted to promote specific industries or sectors.
What is section 10AA?
- This section deals with tax holiday for units established in special economic zones. A special economic zone is a region with laws governing commerce and business that differ from those in other parts of the nation. All the assesses who satisfy the conditions mentioned in section 10AA are allowed to the following conditions:
1. For years 1 to 5 – 100% of export profits
2. For years 6 to 10 – 50% of exports profits
3. For years 11 to 15 – 50% of exports
- Following conditions need to be satisfied in order to avail benefit under sec 10AA
1. The assesses is an entrepreneur, i.e. a person who has been granted a letter of approval by the development commissioner to set a unit in Special Economic Zone.
2. The unit in Special Economic Zone beings to manufacture or produce articles or things or provide services on or after April 1,2005, but on or before 31st march, 2020.However if a letter of approval required to be issued in accordance with the provisions of SEZ ACT,2005, has been issued on or before 31st march,2020, this limit will get extended to 31st march 2021.
3. It is not formed by the splitting up, or reconstruction, of business already in existence.
4. It is not formed by the transfer to a new business, of old plant & machinery. however, it can be formed by the transfer of old plant or machinery to the extent of 20%.
5. The assesses has exported goods or provided services out of India from the Sez by land, sea, air or by any other mode, whether physical or otherwise.
What is section 80 IAC ?
- Under section 80 IAC startups can avail tax deduction of an amount which will be equal to one hundred percent of their profits and gains from qualified business.
- Startups must apply for this tax exemption through the Startup India website. After receiving approval, the startup is allowed to earn income from holidays for three consecutive fiscal years throughout the company’s first ten years of existence.
- Eligibility criteria:
1. Startups ought to be acknowledged by DPIIT as such.
2. Startups must be formed as a private limited company or as a limited liability partnership (LLP).
3. Startups can seek tax exemptions only during their first ten years of incorporation.
4. The company’s total annual revenue must be less than 100 crore rupees.
5. The startup must be formed after April 1st, 2016.
Note: The period for incorporation of qualifying startups would be extended till April,2024.
Conclusion: Tax holidays can be a potent tool for unlocking economic potential, provided they are implemented with careful planning and evaluation. The article has provided a comprehensive overview of tax holidays, delving into their benefits, working mechanisms, and key sections. Leveraging the advantages of tax holidays requires a nuanced understanding of trade-offs and potential long-term impacts on economic growth.
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The above article is written by Mr. Mihir Verma (mihir.verma@abacussolutions.co.in) and reviewed by Mr. Suyash Tripathi (suyash.tripathi@abacussolutions.co.in).
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