There are various incentives available to businesses depending on the economic activity, industry, location, and size of the firm.
India offers tax relief at both the central and state level. Additional incentives are available to investors in specific sectors, while India’s special economic zones (SEZs) offer their own comprehensive tax relief. However, not all tax benefits offered are mutually inclusive.
Corporate tax incentives for eligible companies
The corporate income tax rate for new companies is 22 percent rate and for new domestic manufacturing is 15 percent.
The concessional tax regime (22 percent) for domestic enterprises is applicable only if they do not avail of specific tax incentives or deductions. (The effective tax rate for these domestic companies is around 25.17 percent inclusive of surcharge and cess.)
Those companies opting for the concessional corporate tax rate do not have to pay minimum alternate tax. India’s current effective tax rate brings it at par, on average, with leading Asian investment destinations and manufacturing hubs like China, Vietnam, Malaysia, Singapore, and South Korea.
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Tax Rates for Domestic Companies for FY 2023-24 |
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Section |
Conditions |
Tax rates (%) |
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Section 115BA |
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25% |
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Section 115BAA |
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22% |
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115BAB |
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First Schedule to Finance Act 2010 |
Turnover or gross receipt of the company is less than INR 4 billion in the previous year |
25% |
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First Schedule to Finance Act 2010 |
Other domestic company |
30% |
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Surcharge Applicable to Companies for FY 2023-24 |
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Total income |
Surcharge rate (%) |
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If total income is more than INR 10 million |
7% |
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If total income is more than INR 100 million |
12% |
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If domestic company opted for sections 115BAA and 115BAB |
10% |
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Note: The amount of income tax and the applicable surcharge shall be further increased by health and education cess calculated at the rate of four percent of such income tax and surcharge. |
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Tax rates for foreign companies
A foreign company is liable to pay income tax at 40 percent of the average taxable Income.
Tax rate for partnership firms, including LLP or local authorities
A partnership firm, LLP, or a local authority must pay income tax at 30 percent of average taxable Income.
Tax incentive for capital expenditure on specified businesses
100 percent deduction of capital expenditure is allowed in the year when the commercial operations begin for the following specified businesses, including:
- Setting up and operating cold chain facilities;
- Setting up and operating warehousing facilities for storage of agricultural produce;
- Setting up and operating an inland container depot, freight station; or
- Warehousing facility for storage of sugar, beekeeping, and honey and beeswax production.
Incentives for Special Economic Zones (SEZs)
SEZs offer several incentives to foreign investors, such as ease of doing business, tax benefits, and favorable policies, which make it easier for them to invest in India. They include:
- Tax benefits: SEZ developers and units qualify for tax exemptions on their profits and investments for a specific period, varying with the type of SEZ and the approval date. For the first five years, SEZ developers are entitled to a 100 percent income tax exemption on their profits, followed by 50 percent for the next five years. Likewise, SEZ units can avail themselves of a 100 percent income tax exemption on their profits for the first five years, a 50 percent exemption for the following five years, and a 50 percent exemption on reinvested profits for the next five years.
- Customs duty exemption: SEZ units can import goods duty-free for their authorized operations and source goods from the Domestic Tariff Area without paying any duty.
- Simplified procedures: SEZ units enjoy streamlined procedures for approvals, registrations, and certifications. They can benefit from a single-window clearance system that caters to all their needs.
- Infrastructure support: SEZ developers can construct and maintain infrastructure facilities like roads, power, water, and communication networks within the SEZ, with government aid. SEZ units have access to top-notch infrastructure facilities within the zone.
- Flexibility in employment: SEZ units are allowed to hire both domestic and foreign workers without any restrictions. They can also provide better compensation packages to their employees. Additionally, India has liberalized rules to allow Work From Home (WFH) facility to 100 percent of SEZ unit employees till December 31, 2023.
Tax incentives in different Indian states
Foreign companies choosing where to set up in any of India’s states should note that each region has its own set of policies and incentive schemes. The applicability of incentives usually varies based on:
- The state’s location;
- The products that will be manufactured;
- The scale of investment; and
- The creation of jobs.
Social security agreements
India has concluded various Social Security Agreements (SSAs) to ease the social security obligations on cross-border/international workers. Incentives such as detachment, exportability of pension, totalization of benefits, and withdrawal of social security benefits are available.
As of 2023, India has signed SSA with 20 countries, including Belgium, Germany, Switzerland, Denmark, Norway, Luxembourg, France, South Korea, Netherlands, and Hungary to name a few.
SSAs offer three types of benefits for international workers and NRIs, namely: detachment, exportability, and totalization.
- Detachment eliminates the need for workers to make social security contributions in the host country for a specific period (as stipulated by each SSA) if they continue to contribute to their home country's social security system. To avail of this benefit, the employee must present a 'Certificate of Coverage' (CoC) from their home social security authorities to the host country's authorities.
- Exportability allows workers to receive social security benefits in either their home country or their host country without any difference in the value of the benefits. This enables workers to export their benefits from their host country to their home country or to beneficiaries after retirement or when their employment there ends.
- Totalization takes into account the duration of an employee's work in a foreign country when determining their eligibility for benefits. The payment amount is prorated based on the length of time the employee worked in the foreign country.
Incentive applicable for FY 2024
- With a view to encouraging more startups, the corporate concessional tax rate of 15 percent is available up to March 31, 2024;
- Several schemes have been introduced to promote manufacturing in India, such as Manufacture and Other Operations in Customs Warehouse (MOOWR) and PLIs for several sectors. Further, the Government also introduced the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme to promote exports of goods from India;
- Several customs duty-related changes have been introduced to motivate domestic manufacturers;
- The deadline for incorporations of startups claiming tax holiday benefits has been proposed to be extended by one year, i.e., from March 31, 2023, to March 31, 2024;
- Faceless customs have been fully established, thereby enhancing the ease of doing business;
- Micro, Small, and Medium Enterprises (MSMEs) can continue to avail of their non-tax benefits for a period of one to three years after they have achieved upward growth in investment and/or turnover, which will classify them in a higher category;
- Concessional rate of 15 percent (plus surcharge and cess) on new manufacturing co-operative societies that meet the necessary requirements, starting from April 1, 2023; and
- Startups in India can now carry forward and set off their losses incurred during the first ten years of incorporation, regardless of changes in shareholding, as long as all shareholders remain invested during the relevant period. The government has proposed to extend the previous time limit of seven years to ten years.
