Tax planning for new business with reference to nature of Business

-

Tax Planning with Reference to Type of Activity

Tax planning with respect to the nature of business activities involves understanding and utilizing specific tax provisions that apply to various types of businesses. Below is a detailed explanation of the key sections:

1. Section 10(1): Agricultural Income

  • Benefit: 100% exemption from tax on agricultural income.
  • Details: Agricultural income is fully exempted from tax under this section. This exemption applies to income derived from activities such as farming, cultivation of crops, and similar agricultural activities.
  • Purpose: This provision encourages agricultural activities and supports farmers by excluding agricultural income from the tax base.

2. Section 10(23FB): Venture Capital Companies

  • Benefit: 100% tax exemption on dividends and long-term capital gains (LTCG) for venture capital companies and funds.
  • Details:
    • Venture Capital Company: Must be registered under the Securities and Exchange Board of India (SEBI) Act, 1992.
    • Venture Capital Fund: Operates under a trust deed registered under the Registration Act, 1908 or as a scheme by the Unit Trust of India. Must also be registered under the SEBI Act, 1992.
  • Purpose: This provision encourages investment in startups and high-growth enterprises by providing tax relief on returns from venture capital investments.

3. Section 33AB: Development Accounts

  • Benefit: Deduction for deposits made to development accounts for tea, coffee, or rubber industries.
  • Details:
    • Deduction Amount:The lesser of:
      • The amount deposited in the development account.
      • 40% of the profits from such business (before any deduction under this section).
  • Purpose: Supports the development and growth of tea, coffee, and rubber industries by providing tax incentives for reinvesting in development accounts.

4. Section 35D: Amortization of Preliminary Expenses

  • Benefit: Allows amortization of certain preliminary expenses over ten years.
  • Details: Expenditure incurred before or after the commencement of business, related to setting up or extending an industrial undertaking, can be deducted as 1/10th of the expenditure each year for ten successive years.
  • Purpose: Helps businesses spread the initial costs of setting up or expanding an industrial unit, easing financial pressure during the early years.

5. Section 35E: Prospecting for Minerals

  • Benefit: Allows amortization of expenditure related to prospecting or extracting minerals.
  • Details: Deduction of 1/10th of the expenditure incurred on prospecting, extracting, or producing minerals is allowed for each relevant previous year.
  • Purpose: Encourages investment in mineral exploration and extraction by providing tax relief for related expenses.

6. Section 35ABB: Telecommunication Licences

  • Benefit: Depreciation on capital expenditure for telecommunication licenses.
  • Details: Provides a deduction for capital expenditure incurred to acquire rights to operate telecommunication services. The deduction is spread over the life of the license.
  • Purpose: Supports the telecom industry by allowing recovery of capital costs over the license period.

7. Section 36(1)(viii): Special Reserve by Financial Corporations

  • Benefit: Deduction for special reserves created by specified financial corporations.
  • Details: Allows a deduction up to 20% of the profits for reserves created and maintained by financial corporations. If reserves exceed twice the paid-up share capital and general reserves, no deduction is allowed for the excess.
  • Purpose: Encourages financial corporations to maintain reserves for stability and risk management.

8. Section 42: Mineral Oil Prospecting

  • Benefit: Special provisions for deducting expenses related to mineral oil prospecting and extraction.
  • Details: Deductions are allowed in lieu of or in addition to other allowances admissible under the Income Tax Act for businesses involved in mineral oil prospecting or extraction.
  • Purpose: Provides specific tax benefits to support the oil and gas sector.

9. Section 44BB: Mineral Oils

  • Benefit: 10% of aggregate amounts deemed as profits for services related to mineral oil prospecting.
  • Details: For businesses providing services or equipment for mineral oil prospecting or extraction, 10% of the amounts received is deemed as profits.
  • Purpose: Simplifies tax computation for companies involved in providing services to the oil sector.

10. Section 44AD: Civil Construction

  • Benefit: 8% of gross receipts deemed as profits for civil construction businesses.
  • Details: For businesses engaged in civil construction or supply of labor for construction, 8% of gross receipts is deemed as profits. Alternatively, a higher amount declared by the assessee can be considered.
  • Purpose: Provides a simplified method for tax computation in the construction sector.

11. Section 44AE: Goods Carriage

  • Benefit: Deemed profits for plying, hiring, or leasing goods carriages.
  • Details:For businesses owning up to 10 goods carriages, the deemed profits are calculated based on fixed monthly amounts per vehicle:
    • Rs. 3,500 per month for heavy goods vehicles.
    • Rs. 3,150 per month for other vehicles.
  • Purpose: Simplifies tax computation for small businesses in the transport sector.

12. Section 44AF: Retail Business

  • Benefit: 5% of total turnover deemed as profits for retail businesses.
  • Details: For retail businesses, 5% of the total turnover is deemed as profits.
  • Purpose: Provides a simplified tax regime for retail traders.

13. Section 44B: Shipping Business (Non-Residents)

  • Benefit: 7.5% of the aggregate amounts deemed as profits for non-resident shipping businesses.
  • Details: Non-residents engaged in shipping operations are deemed to have 7.5% of their aggregate receipts as profits.
  • Purpose: Simplifies tax calculations for non-resident shipping companies.

14. Section 44BBA: Aircraft Operation (Non-Residents)

  • Benefit: 5% of aggregate amounts deemed as profits for non-resident aircraft operators.
  • Details: Non-residents operating aircraft are deemed to have 5% of their aggregate receipts as profits.
  • Purpose: Provides a simplified tax regime for non-resident aircraft operators.

15. Section 44BBB: Turnkey Power Projects (Foreign Companies)

  • Benefit: 10% of amounts paid for turnkey power projects deemed as profits.
  • Details: For foreign companies engaged in civil construction or erection of plant/machinery for turnkey power projects, 10% of the amounts received is deemed as profits.
  • Purpose: Facilitates tax computation for foreign companies involved in power project construction.

16. Section 44D: Royalties and Technical Fees (Foreign Companies)

  • Benefit: Deductions for royalties or fees for technical services are capped at 20% of the gross amount.
  • Details: Foreign companies earning royalties or technical service fees can claim deductions up to 20% of the gross amount.
  • Purpose: Simplifies tax treatment for foreign companies receiving royalties or technical fees.

17. Section 80IA: Infrastructure Development

  • Benefit: 100% or 30% deduction of profits from infrastructure projects, depending on the type and period of the project.
  • Details:
    • Infrastructure Facility: 100% for 10 years.
    • Telecommunication: 100% for the first 5 years; 30% for the next 5 years.
    • SEZs and Industrial Parks: 100% for 10 years.
    • Power Projects: 100% for 10 years, with extended benefits for substantial renovations.
  • Purpose: Encourages investment in infrastructure, telecommunications, and power projects by providing substantial tax deductions.

18. Section 80-IB(11A): Processing and Preservation of Food

  • Benefit: 100% deduction for the first five years, followed by 25%-30% for the next years for businesses involved in processing, preservation, and packing of food.
  • Details: Applies to businesses involved in processing, preservation, and packing of fruits or vegetables, and handling of foodgrains.
  • Purpose: Supports the food processing industry and infrastructure for food storage and transportation.

19. Section 80-IB(11B): Rural Hospitals

  • Benefit: 100% deduction for the first five years for profits from operating and maintaining hospitals in rural areas.
  • Details: Applies to hospitals situated in rural areas, providing full tax relief for the initial five years.
  • Purpose: Encourages healthcare infrastructure development in rural regions.

20. Section 80-IB(11): Cold Chain Facilities

  • Benefit: 100% deduction for the first five years, followed by 25%-30% for the next years for cold chain facilities for agricultural produce.
  • Details: Applies to facilities involved in cold storage and transportation of perishable goods.
  • Purpose: Supports investment in infrastructure for the storage and transport of perishable agricultural products.

21. Section 80-IB(7A): Multiplex Theatres

  • Benefit: 50% deduction of profits for the first five years from owning and operating multiplex theatres.
  • Details: Applies to businesses involved in building, owning, and operating multiplex theatres.
  • Purpose: Encourages investment in entertainment infrastructure by providing tax relief.

22. Section 80-IB(7B): Convention Centres

  • Benefit: 50% deduction of profits for the first five years from owning and operating convention centres.
  • Details: Applies to businesses involved in building, owning, and operating convention centres.
  • Purpose: Stimulates the development of venues for large-scale events and conferences.

23. Section 80-JJA: Bio-Degradable Waste

  • Benefit: 100% deduction for the first five years for profits from processing bio-degradable waste for power generation or bio-fertilizers.
  • Details: Applies to businesses involved in collecting and processing bio-degradable waste.
  • Purpose: Promotes waste management and renewable energy by providing tax incentives.

Summary

These tax provisions are designed to encourage investment and growth in specific sectors by providing targeted tax benefits. They support agriculture, infrastructure, telecommunication, energy, healthcare, and various other industries by offering exemptions, deductions, and simplified tax regimes. This helps to stimulate economic development and investment in key areas.