The Industrial Park Scheme, 2008 was announced to provide momentum to the manufacturing sector. This scheme replaces the earlier Industrial Park Scheme, 2002, although undertakings notified under that scheme will continue to enjoy the benefits defined under that scheme.
The 2008 scheme encourages developers to create infrastructure facilities for manufacturing units. It provides a 10-year tax holiday under Section 80-IA of the Income Tax Act, 1961 ('the Act') to any undertaking that develops, develops and operates or maintains and operates an industrial park set-up during April 1, 2006 to March 31, 2009. The scheme was notified in 2008 to give benefit retrospectively (to the units set up post April 1, 2006). Though no tax benefits are available to the units set-up in the industrial parks, they benefit indirectly in form of lower rent, higher FSI index, etc.
This scheme is different from other tax holiday schemes be it the export-oriented unit (EOU) scheme or special economic zone (SEZ). Both these initiatives are largely aimed at promoting exports and foreign exchange earnings. SEZ, per se give benefits both to the developer of an SEZ and also to the units housed in the said SEZ, unlike the Industrial Park Scheme 2008 where the benefit is limited only to the developer of the industrial park.
The Industrial Park Scheme, 2008, in comparison to its predecessor 2002 scheme has simplified the approval procedures. Instead of the two-level approval required under the 2002 scheme, from Secretariat of Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and the Central Board of Direct Taxes (CBDT), the application is now required to be made only to CBDT for notification. The key conditions for undertakings to be eligible for benefits under Section 80-IA (4) (iii) are:
The date of commencement of the Industrial Park should be on or after April 1, 2006 and not later than March 31, 2009;
There shall be a minimum of 30 industrial units located in the park. The tax benefits will be available to the undertaking only after setting up of minimum number of 30 units;
For the purpose of determining the minimum number of industrial units; all units of a person and his associated enterprises will be treated as a single unit;
The park should be owned by only one undertaking. 'Industrial Park' under the scheme, means a project in which plots of developed space or built up space or a combination, with common facilities is developed and made available to the units for the purposes of industrial or commercial activities;
The area allocated to industrial units is not less than 90 per cent of the allocable area;
The minimum constructed floor area is not less than 50,000 sq.mt;
No industrial unit, along with the units of an associated enterprise, shall occupy more than 25 per cent of the allocable area; and
Industrial units shall undertake only manufacturing activity as defined in Section D of the National Industrial Classification, 2004, Code issued by the Central Statistical Organisation, Department of Statistics. This includes manufacturing of machinery and equipments, electrical machinery and apparatus, chemicals and chemical products, basic metals, motor vehicles, etc.,).
An early review of the scheme provisions highlights the following potential issues:
Unlike the 2002 scheme, the Industrial Park Scheme, 2008 has restricted applicability to manufacturing activities only for claiming tax benefits by the developer of the industrial park. The 2002 scheme provided for tax benefits to developers of industrial parks dedicated to a wider set of commercial activities such as research and development, IT and ITES, and consultancy. Currently, the only other scheme which provides for tax benefits to the developers for developing sector specific or multi-sector business parks is the SEZ.
However, the SEZs are more appropriate for large scale ventures, given their much larger minimum land area, built-up area and net worth obligations. This excludes mid-range developers of non-manufacturing business parks who are unable to either invest or pool-in the necessary land area. Therefore extending the scope of the Industrial Park Scheme, 2008 beyond manufacturing activities would fill the fiscal incentives gap for small and medium range developers.
There may be many undertakings which had applied under the 2002 scheme before March 31, 2006, and are not yet approved. With the commencement of the 2008 scheme and the approval authority now being changed to CBDT, there is no clarity for applications prior to March 31, 2006 on the approval process and if the park was intended for non-manufacturing businesses. These issues need to be sorted for the smooth functioning of the new scheme and in achieving its core purpose.
One core condition is the minimum number of 30 units and the tax benefits kicking-in only after such minimum number of units are established in the industrial park. Also it seems that requirement of minimum 30 units needs to be met at all the times for the duration of the tax holiday period. However, this seems like a harsh condition and puts unreasonable pressure on the developer for maintaining 30 units all the time. There should be flexibility built into the provisions for continuance of tax benefits for periods of defined range of sub-peak occupancy of the park. Also the restriction of any single unit not occupying more than 25 per cent of the area will preclude larger units leveraging the industrial park scheme.
As per the notification, the undertaking has to develop, develop and operate or maintain and operate an industrial park any time during the period beginning on April 1, 2006, and ending on March 31, 2009. There is lack of clarity whether undertakings which are only maintaining and operating the industrial parks are also eligible to claim tax benefits along with the developer of the industrial parks, in case such activities are performed by a separate undertaking.
The tax benefits under the Act are currently available only to the undertaking notified by CBDT and not to any other person, who may subsequently develop, develops & operates or maintains & operates the notified Industrial Park, arising from change in ownership. There is not enough clarity as to why there is a restriction on tax benefits for the successor undertaking.
If we look at the computation mechanism, Section 80 IA provides for 100 per cent tax deduction from the profits of the business. However, there has been a controversy even in the 2002 scheme on whether the profits are termed as business profits or any other income. The major source of income for a developer is rental income from leasing of units, and one of the views for calculating deduction under Section 80 IA is to consider only business income. However the categorization of income as house property income by the developer should not lead to denial of benefits. Clearly, there is scope to clarify this issue.
Notwithstanding, the Industrial Park Scheme, 2008, is a positive move and because of its smaller minimum area requirements a complimentary initiative to the SEZ framework. This scheme provides a flexible and shorter 'time-to-market' lever to state governments and other developmental agencies to pursue their economic and social developmental agenda. However, extending the scope of industrial parks beyond manufacturing, pragmatic approach to applying the condition of minimum 30 units, clarifying the overlap with 2002 scheme are some of the core challenges to be addressed for fully leveraging the benefits of this scheme.