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Section 80-IA | Deductions to Industrial Undertakings and Infrastructure Development Enterprises

Last Update Date : August 12, 2018

Section 80IA

Infrastructure development is a part of nation building. It builds assets for the country, and if a country lacks assets, the road to development gets even more difficult. Therefore, it becomes an integral part of the government’s plans to prioritise the industry. The Income Tax Act, 1961 provides for such deductions and tax holidays under section 80-IA. Learn more in this advanced guide by H&R Block.

Section 80-IA – Eligibility Criteria and Allowed Deductions

Deduction for Businesses Involved in the Development of Infrastructure Facilities

An undertaking / enterprise carrying business of:

  1. developing; or
  2. operating and maintaining; or
  3. developing, operating and maintaining

any infrastructure facility is eligible for claiming tax deduction under section 80-IA.

Here, infrastructure facility means:

  1. a road, including toll road, a bridge or a rail system;
  2. a highway project including housing or other activities being an integral part of the highway project;
  3. a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;
  4. a port, airport, inland waterway or inland port or navigational channel in the sea.

Conditions to Claim Deduction

I. It must be owned by

  • An Indian company or a consortium of such companies; or
  • An authority or a board or a corporation or any other body established or constituted under any Central or State Act.

II. There should be an agreement with any Government or a local authority or statutory body for developing (etc.) a new infrastructure facility.

III. Operating and maintenance of such infrastructure facility starts on or after 1st April, 1995.

Deduction Amount

100% of profits and gains derived from such business are allowed as deduction for a period of any 10 consecutive years out of 20 years from the year in which it starts its operations except in case of port, airport, inland waterway or inland port or navigational channel in the sea where deduction allowed is for any 10 consecutive years out of 15 years.

Deduction for Businesses Conducting Telecommunication Services

Any undertaking, who starts providing telecommunication services, basic or cellular, including radio paging, domestic satellite service or network of trunking (not), broadband network and internet services on or after 1st April 1995 but before 1st April 2005.

Conditions to Claim Deduction

I. It is not formed by splitting up or reconstruction of a business already in existence.

Exceptions

Undertaking formed as a result of reconstruction of any business:

1. Discontinued due to extensive damage or destruction of any building, machinery, plant or furniture owned and used for such business due to

  1. flood, typhoon, hurricane, cyclone, earthquake or other natural calamities, or
  2. riot or civil disturbance, or
  3. accidental fire or explosion, or
  4. Enemy action or action taken in combat.

2. Such business is re-established or revived within 3 years from the end of such previous year.

II. It is not formed by the transfer of machinery or plant previously used for any purpose.

Exceptions

3. Transfer (whole or part), of machinery or plant previously used by a State Electricity Board.

4. Import of second-hand machinery or plant, if the following conditions are fulfilled:

  1. Such machinery or plant was not used in India prior to the date of installation by the assessee.
  2. No deduction on account of depreciation was allowed to any person prior to the date of installation by the assessee. Total value of second-hand plant or machinery previously does not exceed 20% of the total value of the machinery or plant used in the new business.

Deduction Amount

100% of profits for the first 5 assessment-years is allowed as a deduction and 30% for the next 5 assessment years out of 15 years from the year in which it starts its services.

Businesses Involved in the Development of Business Parks and SEZs

Any undertaking which:

  1. Develops, or
  2. Develops and operates, or
  3. Maintains and operates

an industrial park or a Special Economic Zone (SEZ) notified by the Central Government.

Conditions to Claim Deduction

I. It shall start to operate in accordance with the scheme framed and notified by the C.G. for the period starting from 1st April, 1997 and ending on

  • 31st March, 2006 for SEZs.
  • 31st March, 2011 for industrial parks.

However, deduction shall not be available for any SEZ notified on or after 1st April, 2005.

Deduction Amount

100% of profits derived from such business for any 10 consecutive years out of 15 years from the year in which it starts its services.

Businesses Involved in the Generation and Distribution of Power

Any undertaking which:

  1. is set up in India for the generation or generation and distribution of power (started generating power between 1st April, 1999 to 31st March, 2011).
  2. Starts transmission or distribution by laying new transmission and distribution lines at any time between 1st April, 1999 and 31st March, 2011.
  3. Undertakes substantial renovation and modernization of the existing network, at any time between 1st April, 2004 and 31st March, 2011.
    Renovation and Modernisation means an increase in the plant and machinery in the network by at least 50% of the book value of such plant and machinery as on 1st April, 2004.

Conditions to Claim Deduction

I. It is not formed by splitting up or reconstruction of a business already in existence.

Exceptions

Undertaking formed as a result of reconstruction of any business:

1. Discontinued due to extensive damage or destruction of any building, machinery, plant or furniture owned and used for such business due to

  • flood, typhoon, hurricane, cyclone, earthquake or other natural calamity, or
  • riot or civil disturbance, or
  • accidental fire or explosion, or
  • Enemy action or action taken in combat.

2. Such business is re-established or revived within 3 years from the end of such previous year.

II. It is not formed by the transfer of machinery or plant previously used for any purpose.

Exceptions

1. Transfer (in whole or part), of machinery or plant previously used by a State Electricity Board.

2. Import of second-hand machinery or plant, if the following conditions are fulfilled:

  • Such machinery or plant was not used in India prior to the date of installation by the assessee.
  • No deduction on account of depreciation was allowed to any person prior to the date of installation by the assessee. Total value of second hand plant or machinery previously does not exceed 20% of the total value of the machinery or plant used in the new business.

Deduction Amount

100% of profits derived from such business for any 10 consecutive years out of 15 years from the year in which it starts its services.

Business Involved in the Reconstruction of Power Plant

An undertaking:

  1. owned by an Indian company and
  2. set up for reconstruction or revival of a power generating plant.

Conditions to Claim Deduction

I. Formed before 30th November 2005 and notified by C.G. before 31st December 2005.
II. It starts to generate or transmit or distribute power before 31st March 2011.

Deduction Allowed

100% of profits derived from such business are allowed as a deduction for any 10 consecutive years out of 15 years from the year in which it starts its services.

Businesses Involved in the Distribution of Natural Gas

An undertaking which lays and begins to operate a cross-country natural gas distribution network, including pipelines and storage facilities being an integral part of such network.

Conditions to Claim Deduction

I. Same as (I) in 2.

II. Same as (II) in 2.

III. It must be owned by an Indian company or a consortium of such companies or a board or corporation established or constituted under any Act.

IV. It must be approved by the Petroleum and Natural Gas Regulatory Board.

V. 1/3 of its total pipeline capacity must be available for use on common carrier basis by any person other than the assessee or an associated person.

VI. It starts to operate on or after 1st April 2007.

VII. Any other condition as may be prescribed.

Here, associated person means a person who:

  1. Participates in the management or control or capital of the assessee.
  2. Holds shares of the assessee having more than 20% voting rights.
  3. Appoints more than half of the BOD, or one or more executive directors or executive members of the governing board of the assessee.
  4. Guarantees at least 10% of the total borrowings.

Deduction Amount

100% of profits derived from such business are allowed as a deduction for any 10 consecutive years out of 15 years from the year in which it starts its services.

Explanation of the Term Initial Assessment Year

  • The deduction under section 80-IA can be claimed for any 10 years at the option of the assessee out of 15 years or 20 years as may be prescribed for particular cases.
  • However, for the purpose of claiming deduction the term initial assessment year means the first year from which the assessee starts to claim the deduction and not the year in which the business starts its operations.
  • The period of deduction, i.e. 10 years solely depends on the assessee from whichever year it wants to claim out of 15 years or 20 years as may be prescribed for particular cases.

Other Important Points to be Considered

1. The date for the purpose of computing deduction shall be the date from which the business starts commercial production and not just on trial basis.
And it should also be noted that the date shall be the date of starting the project and not the date of approval of the project.

2. For computing deduction under this section, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income during the relevant previous years.

3. The industrial undertaking should have begun to manufacture or produce articles or things on or before March 31, 2004. Licence for manufacturing should have been applied before this date.  The grant of the licence would not relate back to the original date of application.

4. Deduction u/s 80IA shall not be available in relation to an eligible business, in the nature of a works contract awarded by any person (including any Government) and executed by the undertaking or enterprise.

5. The accounts of such eligible business are required to be audited by a Chartered Accountant and the audit report shall be furnished in the prescribed form along with ROI.

6. The deduction under this section shall not exceed the amount of profits or gains of such business.

7. The Central Government may declare any class of industrial undertaking or enterprise as not being entitled to deduction under this section.

8. Where an infrastructure facility or SEZ or Industrial park is transferred on or after 1st April, 1999 by an enterprise who developed it for the purpose of operating and maintaining it in accordance with the agreement with any Government, local authority or statutory body, section 80IA shall apply to the transferee enterprise for the unexpired period of deduction which was available to the first enterprise.
The transferee shall not be eligible for deduction for the entire period.

9. Where housing or other activities are an integral part of a highway project and the profits and gains have been calculated in accordance with the section, the profits shall be exempt if the following conditions have been fulfilled, namely-

  • The profits have been transferred to a special reserve account; and
  • The same is actually utilised for the highway project excluding housing and other activities before the expiry of 3 years following the year of transfer to the reserve account.

10. Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or vice versa, and if the transfer does not take place at the market value of the goods or services then the profits and gains of the eligible business shall be computed as if the transfer was made at market value.

Note:

  • If in the opinion of the A.O., such computation presents exceptional difficulties, the A.O. may compute the profits on such reasonable basis as he may deem fit.
  • Market value means the price such goods or services would ordinarily fetch in the open market.

11. No deduction for the profits or gains of such business shall be allowed under any other section of this chapter, if the assessee has claimed deduction under section 80IA.

12. Where the A.O. feels that the assessee has derived more than ordinary profits from eligible business being whatsoever reason, A.O. may consider such amount of profits as he finds reasonable for the purpose of computing deductions.

13. Transfer of undertaking before the expiry of tax holiday period. Where an undertaking eligible for deduction under section 80IA has been transferred from one Indian Company to another Indian Company under the scheme of amalgamation or demerger.

  • No deduction to the amalgamating or demerged company, in the year of amalgamation or demerger.
  • The provisions of this section will apply to the amalgamated or resulting company as they would have applied to the amalgamating or demerged company if the amalgamation or demerger had not taken place.

Note: The above provision shall not be applicable for transfer on or after 1st April 2007.

Infrastructure, both economic and social, is essential for the development of a country. As a support system, it directly influences all economic activities. In the past few decades, India has made a considerable progress in building infrastructure. However, India still lacks behind in the global competition in terms of infra and still has a scope of growth. And, here is how the government is trying to boost the infrastructure industry by providing 100% tax exemptions under section-80IA as explained above. Therefore, it is utmost important to know the tax implication and benefits arising out of it. Reach out our experts of the industry to have more broadened vision and ways to save tax at H&R Block, India.

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