Section 80IA – Tax Deductions for Infrastructure Development: All You Need to Know

About Section 80IA

You have probably heard of Section 80IA. It is one of India’s most popular tax deductions, and for a good reason: it offers significant tax benefits for businesses that invest in infrastructure development.

But what, exactly, does Section 80IA entail? And how can your business take advantage of it? In this article, we will answer these questions and more. So, if you are thinking of investing in infrastructural development, read on—you do not want to miss out on these tax deductions.

Overview of Section 80IA

Section 80IA of the Income Tax Act lays down the requirements for deductions that an assessee can claim, including investments in a project for infrastructure development. The deduction is available to Indian and foreign companies, and the investment can be either equity or debt.

The incentive offered under Section 80IA is significant, as it can amount to a deduction of up to 100% of the investment made. This makes it an attractive option for companies looking to invest in infrastructure development projects.

Key Features of Section 80IA

Section 80IA of the Indian Income Tax Act incentivises eligible assessees involved in developing infrastructure. This section allows for tax deductions on business-related profits over a set period. These deductions are allowed at a rate of 100% of the profits and gains from eligible businesses.

Other important features you should know about section 80IA include:

• Depending on the business’s physical location, there are minimum and maximum limits for deductions.
• The profits or gains from any international transaction shall not be considered for calculating deductions under section 80IA.
• The deductions under this section are available only if no double taxation agreement exists between India and another country or specified territory.
• An eligible business must have a proper accounting system for deduction under Section 80IA.
• To get a deduction under this section, an assessee must comply with all provisions mentioned in areas 44AB, 44AD, 44AE and 44AF.

Amendments to S. 80IA

Section 80IA of the Income Tax Act was amended by the Finance Bill 2020-21 to give additional deductions for certain infrastructure facilities (like roads, railways, airports, etc.). The additions to Section 80IA include the following:

• A deduction of 100% of the profits from any business developing or operating any infrastructure facility is allowed.
• A deduction of 50% of the profits from any company developing or using a specified roadside infrastructure facility is permitted.
• An additional deduction of 15% is allowed on the profits derived from businesses developed and operated by a notified State Government.

These amendments will lead to increased investments and development activities in critical infrastructure sectors, creating employment opportunities and improving the quality of life for citizens.

Eligibility Criteria for S. 80IA Tax Deduction

You are eligible for deduction under section 80IA if your business is engaged in the following:

1. Constructing, commissioning, or operating any infrastructure facility
2. Providing goods or services for an infrastructure facility

The deduction is available to both Indian and foreign companies. However, the deduction is available only if the company has a permanent establishment in India.

Types of Projects Covered Under S. 80IA

The types of projects covered under Section 80IA of the Income Tax Act, 1961, are:

(a) a project for

(i) the development of an industrial park

(ii) the development of an integrated township or a business park, or

(iii) the development of an area designated in a notification issued under clause (iv) of sub-section (1) of section 2 of the Special Economic Zone Act, 2005

(b) a project for the setting up of an iron and steel plant

(c) a project for the manufacture of goods or rendering services specified in Schedule I to the said Act

(d) a project for the generation, transmission, or distribution of power or water or both

Read on to learn more details about each project type.

1. Infrastructure facilities: These include toll roads, bridges, rail systems, and housing related to highway projects. Water projects such as water treatment, irrigation, sanitation, sewerage, and solid waste management systems can also be eligible for deductions. Additionally, ports, airports, inland waterways, inland ports, and navigational channels in the sea are eligible.

To qualify for the deduction, ownership should be by an Indian company or an organisation that comes under the Central or State Act. Furthermore, there must be an agreement with a government body or local authority intending to use the facility for developmental purposes. The company must start operating and maintaining the facility on or after 01.04.1995.

100% profits and gains from these businesses over 10 out of 15 years since commencement will be eligible for deductions.

2. Telecommunication services: These include basic or cellular radio paging, domestic satellite and trucking networks, broadband networks, and internet services from April 1995 to April 2005 are also eligible for deduction.

Regarding the requirements of telecommunication services, there are two kinds of limitations. Developing by splitting or reconstructing a business already used is not acceptable. Likewise, transferring machinery or a plant that has already been used is also restricted.

One hundred per cent of profits from the first 5 assessment years may be deducted. In addition, 30% for the next 5 assessment years for 15 years since its commencement.

3. Industrial Parks and SEZ: Industrial parks contain companies that develop, manage and run parks recognised by the Central Government. Both Industrial parks and SEZs require the companies to work according to the rules imposed by Central Government. SEZs are from the 01st of April 1999 to the 31st of March 2006, while Industrial parks are from the 01st of April 1999 to the 31st of March 2011.

The deduction includes 100% profits and gains from businesses over 10 consecutive years within 15 years since its commencement.

4. Generation and Distribution of Power: A power plant was established in India for power generation between the 1st of April 1993 to the 31st of March 2017 and distribution, with a duration between the 1st of April 1999 and the 31st of March 2017.
   The power plant offers restoration and improvement of its network from the 01st of April 2004 to the 31st of March 2011. This offer has allowed it to raise its plant and machinery by 50%, till the 1st of April 2004.
5. Reconstruction of Power Plant: As per S. 80IA, the reconstruction of a power plant is necessary to revive a power-generating plant owned by an Indian company. Requirements include
   • Having been developed before the 30th of November 2005
   • Being recognised by the Central Government before the 31st of December 2005
   • Having begun to generate, transmit or distribute power before the 31st of March, 2011

An allowance of 100% profits and gains obtained from these businesses for 10 consecutive years out of 15 years from their commencement date is allowed.

6. Distribution of Natural Gas involves laying pipelines to disperse it throughout the country. Specific parameters must be followed, such as
   • Not developing the business by splitting up or reconstructing an existing one.
   • Not transferring machinery or plant that is already in use.
   • Being recognised by the Petroleum and Natural Gas Regulatory Board, with an Indian company maintaining it
   • 1/3 of pipeline capacity being made accessible for common carrier basis to all
     citizen
   • Has begun operations on or after the 01st of April 2007

In this case, section 80IA allows the deduction of 100% of profits from these businesses for 10 consecutive years out of 15 years from its commencement period.

Documents Needed to Claim Deduction Under S. 80IA

To avail of the deduction, you need to submit form 10CCB along with the following documents in the relevant assessment year:

• Certification from a chartered accountant or cost accountant states that the undertaking develops and operates an infrastructure facility.
• Copy of written permission granted on or before the 31st of March 2003 by any authority or local body specified under Section 80IA(4)(i) to develop and operate an infrastructure facility.
• Any other document to prove that the enterprise is involved in infrastructure development as per Section 80IA.

Additionally, details about the quantum of expenditure incurred for developing and operating any such infrastructure facility must be provided.

Conditions to comply or be eligible for Claiming Deduction under S. 80IA

Organisations engaged in infrastructure projects may be eligible for a 100% tax deduction under Section 80IA, subject to two essential requirements with a minimum deduction period of 10 years.

• The applicant company must have its headquarters in India or be a subsidiary of an Indian company with a mandate from a central/state government.
• The applicant company must submit a statement of intent to the governmental or municipal body.

Common mistakes to avoid when filing for deduction under S. 80IA

You might be surprised to know that many businesses make avoidable mistakes while filing for deductions under Section 80IA. Here are a few of the most common mistakes to avoid:

• Not filing for deductions: This is perhaps the most common mistake businesses make. You can’t claim them later if you do not file for deductions.
• Filing without the necessary documentation: You must have all your paperwork to make a successful claim. Ensure you have invoices, bills, proof of expenditure and other documents related to your business expenses.
• Claiming ineligible expenses: Just because you incurred some expenses while running your business does not mean you can claim them as deductions. Make sure you are only claiming deductible expenses.
• Not keeping track of your income and expenses: Yet another common mistake that can lead to problems later on. It is essential to keep track of your income and expenses to calculate your deductions accurately.

Illustration

Let us look at an example. Say you want to build a new road with the help of your company. To ensure this process is successful, you need to invest a significant amount of money. If you do this, Section 80IA allows you to deduct a certain percentage of the money you have invested in the project from your taxable income.

The critical factor here is that this deduction will be available only if your project meets certain conditions prescribed by the Income Tax Act. As per one such condition, taxpayers must file their Income Tax Return and claim all applicable deductions. Furthermore, Income Tax Returns must be submitted promptly, as Section 139(1) outlines.

Example: For the financial year 2018-19, the deadline for corporate income tax return filing was the 30th of September 2019. However, XYZ Ltd. submitted their ITR on the 12th of October 2019, seeking deductions under Section 80-IA. Unfortunately, they are not eligible to receive any deductions under this section.

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