Section 32AD of the Income Tax Act: Investments in Notified Backward Areas in India
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19 May 2022
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19 May 2022The Government of India aims to develop every backward region in the country irrespective of how remote it is. With that in mind, Section 32AD of Income Tax Act has come into effect which encourages both corporates and non-corporates to set up plants or machinery in GoI-specified areas.
Read on to learn more details.
Table of contents
What is Section 32AD of Income Tax?
Section 32AD of Income Tax Act provides a legal framework for investment in new plants/machinery in notified areas of certain states.
Which are the States under Section 32AD of Income Tax?
Section 32AD will be applicable if an assessee sets up a manufacturing or production unit in any notified area in the following states:
- Andhra Pradesh
- Bihar
- Telangana
- West Bengal
Which are the Notified Backward Areas under Section 32AD of Income Tax?
Given below are the details of notified backward areas.
Notified areas of Andhra Pradesh under section 32AD are listed as follows:
- Anantapur
- Chittoor
- Cuddapah
- Kurnool
- Srikakulam
- Vizianagaram
- Vishakhapatnam
List of notified areas of Bihar is as follows:
- Arwal
- Banka
- Begusarai
- Bhagalpur
- Buxar
- Gopalganj
- Khagaria
- Kishanganj
- Madhepura
- Munger
- West Champaran
- East Champaran
- Saran
- Saharsa
- Sheikhpura
- Siwan
- Sitamarhi
Provided below is the list of notified areas in Telangana:
- Adilabad
- Mahbubnagar
- Medak
- Nalgoda
- Nizamabad
- Karimnagar
- Khammam
- Rangareddy
- Warangal
Given below is the list of notified areas in West Bengal:
- South 24 Parganas
- Bankura
- Birbhum
- Dakshin Dinajpur
- Uttar Dinajpur
- Malda
- Jalpaiguri
- East Medinipur
- West Medinipur
- Purulia
- Murshidabad
Provisions of Section 32AD of Income Tax Act
As mentioned above, Section 32AD has stated provisions for investment in new plants or machinery in notified backward areas in selected states.
The details of the provisions under this Section are as follows:
Section 32AD (1) of ITA
A taxpayer can avail deductions for setting up an undertaking/enterprise during April 1 2015 to April 1 2020 for manufacture/production in notified areas. It is applicable if the entity sets up a new asset for the undertaking/enterprise.
However, the undertaking/enterprise has to be in a notified area in any of the states of Andhra Pradesh, Bihar, Telangana and West Bengal.
The taxpaying entity can avail a deduction of anything equal to 15% of the actual cost of the new asset in the assessment year against the previous year in which the new asset was set up.
Section 32AD (2) of ITA
IT officials deem the deduction amount under (1) as income if the taxpayer sells the new asset within 5 years of its installation. This income is chargeable under the taxpayer’s profits and gains of businesses or professions’ in the previous year.
Additionally, tax is charged on profits caused by the sale/transfer.
However, it is not applicable if a merger/demerger/reorganization of the business takes place under section 47.
Section 32AD (3) of ITA
Suppose the taxpayer sells/transfers the new asset during the merger/demerger/reorganisation of a business, as per select clauses of Section 47. In that case, the provision given under sub-section (2) will be applicable for the resulting company.
One should note that the sale/transfer has to occur within 5 years of installing the new asset.
Section 32AD (4) of ITA
‘New asset’ includes plant or machinery (except ships or aircraft).
Given below is the list of items and things that do not fall under the term ‘new asset’:
- Plant or machinery used by another person within/outside India before its installation
- Any plant or machinery set up in any office space and residential accommodation, including guest houses
- An appliance used in offices, including computers and computer software
- Vehicles
- Any plant or machinery whose actual cost is allowed as a deduction in computing the income chargeable under ‘profits and gains of businesses or profession’ of a previous year
Also read: https://navi.com/blog/section-32-of-income-tax-act/
Final Word
To sum up, Section 32AD of Income Tax Act encourages taxpaying entities to set up manufacturing or production units in notified areas in the states of Andhra Pradesh, Bihar, Telangana and West Bengal. This guide provides the details of the sub-sections under section 32AD and the list of the notified areas.
FAQs on Section 32AD of the Income Tax Act
Section 47 of Income Tax Act deals with transactions that do not fall under ‘transfers’. The gains arising from such transactions do not fall under capital gain tax primarily because the transferor doesn’t earn any taxable income from these transactions.
Section 32AC provides the guidelines for investments into new plants or machinery. As per this Section, tax-paying entities can avail deductions if the aggregate amount of the actual cost of a new asset exceeds Rs. 100 Crore. However, the new asset will have to be acquired and installed between March 31, 2013 and April 1, 2015.
Certain business sectors have been identified by GoI as integral growth drivers of the country. The Government of India has introduced Section 35AD into ITA to encourage these businesses. As per the provisions under section 35AD, these businesses can avail of deductions. A business that is covered under this Section is the business of operating a cross-country petroleum or natural gas, or crude oil pipeline network.
‘Profits and gains of business or profession’ cover the income that one earns from their profession or business. The IT department charges tax on the amount, the difference between the credits received for running the business and the expenses incurred.
The Government of India allows depreciation to be counted as an expense for the computation of income. Generally, there are two ways of calculating depreciation – Straight Line Method (SLM) and Written Down Value (WDV). As per the Income Tax Department rules, the WDV method of depreciation has to be used.
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