Introduction

Tax incentives for businesses play a significant role in shaping economic growth and development. They are designed to encourage certain behaviors or investments by providing financial advantages to businesses. Tax incentives can be particularly beneficial for small businesses and startups, which often face financial constraints. Tax relief measures, such as reduced tax rates or simplified tax reporting requirements, can ease the burden and help these businesses thrive. By providing support during the early stages, governments can foster entrepreneurship, job creation, and overall economic vitality. The Government of India has implemented various schemes and tax incentives to enhance the ease of doing business and foster the development of the Indian market.

This research article highlights key tax incentives offered to the pharmaceutical and manufacturing industries, emphasizing the Production Linked Incentive (PLI) schemes and tax benefits for startups. Tax Incentives for the Pharma Industry:

The Production Linked Incentive (PLI 1.0) Scheme[1]

The Government introduced the Production Linked Incentive (PLI 1.0) Scheme in 2020, aiming to stimulate domestic manufacturing of vital components in the pharmaceutical industry such as Key Starting Materials (KSMs), Drug Intermediates (DIs), and Active Pharmaceutical Ingredients (APIs). Under this scheme, eligible manufacturers of these identified products can avail financial incentives for a duration of six years. The incentives are determined based on the committed investments and sales made for the eligible products.

Production Linked Incentive Scheme for Pharmaceuticals (PLI 2.0)

Under the PLI 2.0 Scheme, pharmaceutical goods are classified into three categories: Biopharmaceuticals, Complex generic drugs, and Patented drugs approaching patent expiry. The PLI 2.0 Scheme covers pharmaceutical goods under three categories: Biopharmaceuticals, Complex generic drugs, and Patented drugs nearing patent expiry. Incentives are provided based on incremental sales over the base year for each category, with different rates applicable for different periods.

Tax Incentives for Startups: Budget 2022

No Tax for the First Three Years: Startups registered with the Department of Industrial Policy and Promotion (DIPP) are eligible for 100% tax exemption during the initial three years. This exemption allows entrepreneurs to allocate additional funds towards business development, while only paying the Minimum Alternate Tax (MAT) based on the company’s book profit.

Startup India[2]

80 IAC Tax Exemption: Recognized startups can apply for tax exemption under section 80 IAC of the Income Tax Act, allowing them to avail a tax holiday for three consecutive financial years within the first ten years of incorporation.

Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)[3]: Startups meeting certain criteria, such as being DPIIT recognized and maintaining limited share capital and premium, may apply for exemption from Angel Tax.

Tax Incentives for the Manufacturing Industry: Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing[4]: Introduced in 2020, this scheme offers a 4% to 6% incentive on incremental sales of goods manufactured in India under target segments, for a period of five years beyond the base year.

Second Round of the Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing[5]: Launched in 2021, this round provides incentives ranging from 5% to 3% on incremental sales of goods manufactured in India under specified electronic components for a period of four years.

Design Linked Incentive (DLI) Scheme[6]

The Ministry of Electronics and Information Technology has introduced the Design Linked Incentive (DLI) Scheme. This scheme aims to address the challenges faced by the domestic semiconductor design industry. Its purpose is to not only enhance the value chain but also bolster the semiconductor chip design ecosystem within the country.

The scheme provides financial incentives and design infrastructure support for the development and deployment of semiconductor designs, including Integrated Circuits (ICs), Chipsets, System on Chips (SoCs), Systems & IP Cores, and related semiconductor designs. It offers a “Product Design Linked Incentive” of up to 50% of eligible expenditure, capped at ₹15 Crore per application, as well as a “Deployment Linked Incentive” ranging from 6% to 4% of net sales turnover over 5 years, with a ceiling of ₹30 Crore per application.

Production-Linked Incentive (PLI) Scheme in the Automobile and Auto Components sectors[7]:

The automobile sector’s PLI scheme, with a budget of $3.5 billion, aims to promote domestic manufacturing of advanced automotive technology products and attract investments in the automotive manufacturing value chain. Under this scheme, financial incentives of up to 18% are offered. These incentives are applicable to eligible sales of products manufactured in India starting from April 1, 2022, for a consecutive period of five years. The scheme aims to boost the growth of the automobile industry and encourage technological advancements within the country.

Conclusion

The Indian government’s tax incentives play a crucial role in promoting business growth, particularly in the pharmaceutical and manufacturing sectors. By offering lower tax rates, exemptions, or other favorable tax treatments, governments can make their location more appealing for businesses to establish operations, bring capital, and create jobs. The PLI schemes and tax benefits for startups aim to boost domestic manufacturing, innovation, and job creation. By fostering a favorable business environment, India is attracting investment and driving economic development.

FAQs

What are tax incentives and why are they important for businesses?

Tax incentives are financial advantages provided by governments to businesses to encourage specific behaviors or investments. They are important for businesses as they help reduce tax liabilities, improve profitability, and stimulate economic growth by promoting investment, job creation, and innovation.

What specific tax incentives are offered to the pharmaceutical industry in India?

The pharmaceutical industry in India is offered tax incentives through the Production Linked Incentive (PLI) schemes. These schemes provide financial incentives based on incremental sales and investments made in critical components of the pharmaceutical manufacturing process.

What is the Production Linked Incentive (PLI 1.0) Scheme and how does it benefit the pharmaceutical sector?

The PLI 1.0 Scheme promotes domestic manufacturing of Key Starting Materials (KSMs), Drug Intermediates (DIs), and Active Pharmaceutical Ingredients (APIs). Eligible manufacturers receive financial incentives for six years based on committed investments and sales of eligible products, thus encouraging self-reliance in the pharmaceutical sector.


[1]https://static.investindia.gov.in/s3fs-public/2020-08/PLI%20bulk%20drug%20schemes.pdf

[2]https://dipp.nic.in/sites/default/files/Startup_Notification11April2018_0.pdf

[3]https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf

[4]https://www.meity.gov.in/writereaddata/files/Extension%20of%20tenure%20of%20PLI%20LSEM_23.09.2021%281%29.pdf

[5]https://www.meity.gov.in/writereaddata/files/OM_Second%20Round%20of%20PLI%20Scheme.pdf

[6]https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1884068#:~:text=The%20scheme%20provides%20%E2%80%9CProduct%20Design,%E2%82%B930%20Crore%20per%20application.

[7]https://www.investindia.gov.in/production-linked-incentives-schemes-india

Contributed By – Tanishq

King Stubb & Kasiva,
Advocates & Attorneys

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