Some of the tax benefits available to Small-Scale Industries in India are as follows:
Tax Holiday:
Under section 80J of the Income Tax Act 1961, new industrial undertakings, including small-scale industries, are exempted from the payment of income- tax on their profits subject to a maximum of 6% per annum of their capital employed. This exemption in tax is allowed for a period of five years from the commencement of production.
A small-scale industry has to satisfy the following two conditions to avail of this tax exemption facility:
1. The unit should not have been formed by the splitting or reconstruction of an existing unit.
2. The unit should employ 10 or more workers in a manufacturing process with the power or at least 20 workers without power.
Depreciation:
Under Section 32 of the Income Tax Act, 1961, a small-scale industry is entitled to a deduction on depreciation account on block of assets at the prescribed rate. Small enterprise is allowed subject to a maximum of Rs. 20 lakh deduction for depreciation on plant and machinery on the diminishing balance method.
In case of an asset acquired before the accounting period, depreciation is calculated on its written down value. For plant and machinery that are used in manufacturing in double or triple shift, an additional allowance called ‘Extra Shift Allowance’ is also available.
A small-scale industry should satisfy the following conditions before it becomes eligible for deduction in depreciation:
1. The assets must be owned by the assessee.
2. The assets must actually be used for the purpose of the assessee’s business or profession.
3. Depreciations allowance or deduction is allowed only on fixed assets, i.e. building machinery, plant and furniture.
From assessment year 1991-92, in the case of a company, depreciation will be limited to Rs. 7,590/- of the amount calculated at the specified percentage on the written down value block of assets.
Rehabilitation Allowance:
A rehabilitation allowance is granted to small-scale industries under Section 33-B of the Income Tax Act, 1961 whose business is discontinued on account of the following reasons:
1. Flood, typhoon, hurricane, cyclone, earthquake, or other natural upheavals;
2. Riot or civil disturbance;
3. Accidental fire or explosion; and
4. Action by an enemy or action taken in combating an enemy.
The rehabilitation allowance should be used for business purposes within three years of unit’s re-establishment, reconstruction, or revival .The rehabilitation allowance is allowed to the unit equivalent of 60 per cent of the amount of the deduction allowable to the unit.
Investment Allowance:
The Investment allowance was introduced way back in 1976 to replace the initial depreciation allowance. The investment allowance under Section 31 A of the Income Tax Act, 1961 is allowed at the rate of 25 per cent of the cost of acquisition of new plant or machinery installed.
Although the investment allowance has been made available for the articles or things except certain items of low priority, yet as per the Eleventh Schedule to the Income Tax Act 1961, a special dispensation has been provided for the plant and machinery installed in small-scale industries. In comparison with other industries, small-scale industries are at an advantage in claiming a deduction of investment allowance. A small-scale industry can avail of investment allowance provided it has put to use machinery or plant either in the year of installation or in the immediate following year failing which the benefit will be forfeited.
Expenditure on Scientific Research:
Under Section 35 of the Income Tax Act, 1961, the following deductions in respect of expenditure on scientific research are allowed:
1. Any revenue expenditure incurred on scientific research related to the business of the assessee in the previous year.
2. Any sum paid to a scientific research association or a university, college, institution or to a public company which has its object, the undertaking of a scientific research.
3. Any capital expenditure incurred on scientific research related to the business of the assessee subject to the provision of Section 35(2) of the Income Tax Act, 1961.
In case of any unabsorbed capital expenditure incurred on scientific research, the provision of the Income Tax Act allow to carry it forward for adjustment against the profits earned by the business in the subsequent years for an indefinite time period.
Amortization of Certain Preliminary Expenses:
The Indian companies and resident persons, under Section 35D of the Income Tax Act 1961, are allowed to write off the preliminary and developmental expenses incurred by them in connection with the setting up of a new industrial unit or expansion of an existing industrial unit.
The examples of preliminary expenses are:
a. Expenses incurred in connection with the preparation of a feasibility report necessary for their business;
b. Engineering expenses related to the business; and
c. Legal charges, if any, for drafting agreements.
The writing off of the preliminary expenses is allowed against subject to a maximum of ten annual installments beginning with the previous year in which the new unit commences its production or expansion of an existing unit is completed. The aggregate amount of expenditure allowed be deducted is limited to 2.5 per cent of the total cost of the project.
A small-scale unit established in a backward area, under Section 80-HH, is allowed a deduction of 20 per cent on its profits and gains provided the unit satisfies the following conditions:
a. The unit began its production after 31st December 1970 in any backward area of the country;
b. It is a newly established unit in a backward area. It is neither split nor reconstituted out of a business already in existence in any backward area;
c. It has not been formed by the transfer to a new business plant or machinery which was previously used for any purpose in any backward area; and
d. It employs 10 or more workers in a manufacturing process with power or 20 or more workers without power.
Tax Concession to Small-Scale Industries in Rural Areas:
The Finance (No.2) Act of 1977 inserted a new Section 80-HHA in the Income Tax Act, 1961. The tax payers, under this Section 80-HHA, are entitled to a deduction of 20 % of the profits and gains derived by running small-scale industries in the rural areas.
The deduction is allowed for a period of 10 years from the year of commencement of manufacturing activity after 30th September 1977. For this purpose, the expression rural area means any area as defined under the Explanation to Section 35 CC (I) of the Income Tax Act, 1961. However, this tax deduction benefit is not allowed to the small-scale units engaged in mining activity.
The small-scale industry can avail of this tax deduction only after fulfilling the following conditions:
1. The small-scale unit is not formed by splitting or reconstruction of a business already in existence.
2. ‘It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
3. The accounts of the unit are audited by a chartered accountant.
4. It employs 10 or more workers in manufacturing process carried on without the aid of power.
5. The unit does not claim a simultaneous deduction under Section 80-HH of the Income Tax Act, 1961.
Tax Concessions to Small-Scale Industries in Backward Areas:
The Planning Commission of India, in 1970-71, declared 247 districts out of 435 districts as backward areas with a view to provide them special incentives and concessions to establish industries in these backward areas. The newly established small-scale industries in these areas specified in the Eighth Schedule to the Income Tax Act, 1961 are entitled to a deduction of 20% of their profits and gains from their gross total income.
This deduction is allowed for a period of 10 years beginning with the year of commencement of manufacture or production. However, if a small-scale industry has already been established in a non-backward area and later shifted to backward area, the unit will be allowed this deduction on the profits earned from the undertaking after shifting in the backward area for a period of 10 years. A small-scale industry established in backward area but engaged in mining activity is not entitled to such deduction benefit.
The unit has to satisfy the following conditions to be eligible to avail of this tax benefit:
1. It is established on or after 31th December, 1970.
2. It employs at least 10 workers in a manufacturing process carried on with the aid of power or at least 20 workers manufacturing process carried on without the aid of power.
Expenditure on Acquisition of Patents and Copyrights:
Under Section 35-A of the Income Tax Act, 1961, any expenditure of capital nature incurred in acquiring a patent and copyright by a small-scale industry is deductible from its income. But the expenditure should be incurred after 28th February 1966. The expenditure can be deducted in 14 equal installments beginning with the previous year in which the expenditure was incurred in acquiring patents and copyrights for the unit.
Profits from Business of Publication of Books:
Under Section 80-1A of the Income Tax Act, 1961 which has replaced Section 80-1 w.e.f. the assessment year 1991-92, 20% of the profits earned by a small- scale industry from the business of publication of books is deductible from its gross total income. The deduction benefit is available for total period of five years beginning with the assessment year 1992-93.
In addition, deductions are also available in respect of:
1. Royalties from any company in India (Under Section 80 M)
2. Royalties from any certain foreign companies (Under Section 800)
3. Inter-corporate Dividends (Under Section 80 M)
4. Income of Co-operative Societies (Under Section SOP)
5. Carry forward and set -off business losses (Under Section 72)
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